Freddie Mac will launch a new fee-based repurchase alternative pilot program for performing loans in 2024, designed to improve the quality of performing loans through a potential replacement of its current repurchase policy for defective performing loans.
“The pilot will use a fee-based structure that is more efficient, transparent and rewards lenders that deliver high-quality loans,” the GSE said. “Specifically, lenders will not be subject to repurchases on most performing loans and will instead be subject to a fee-based structure based on non-acceptable quality (NAQ) rates.”
That fee uniformly applies to both medium- and large-sized lenders based on NAQ rates, and will be waived for smaller lenders unable to deliver volume large enough to generate an NAQ rate that is “statistically significant.”
“Loans that are non-performing within 36 months or subject to life of loan defects will still be subject to repurchase,” Freddie Mac said. “This fee structure will begin with a limited rollout with targeted lenders in early 2024.”
Last month, Federal Housing Finance Agency (FHFA) Director Sandra Thompson said that the GSEs must implement a fair, consistent and predictable process for identifying loan defects and the appropriate remedies for them during an October event hosted by the Mortgage Bankers Association (MBA) in Philadelphia.
“After multiple years of record-high loan volume, we have seen an increase in the absolute number of repurchase requests – which is to be expected,” Thompson said at the event. “The good news is that there has been a large decrease in repurchase requests since their peak in early 2022, as the Enterprises have worked through loans originated during the refinance boom.”
Thompson went on to say that both Freddie Mac and Fannie Mae have examined their existing processes and practices, which include improving the language in selling guidelines and providing more consistent feedback to lenders on buybacks to minimize ambiguity during the underwriting process.
Commenting on the decision, FHFA director Sandra Thompson said, “The 2024 multifamily loan caps, coupled with the exemption for workforce housing properties from the caps, will promote the enterprises’ continued strong commitment to addressing the need for affordable rental housing.” Thompson explained that this exemption aims to motivate conventional borrowers to maintain affordable rent levels … [Read more…]
Fannie Mae and Freddie Mac jointly announced this week that they have entered a new critical edit phase for their Uniform Closing Dataset (UCD) as of Nov. 6, informing lenders that they must address quality issues for “fatal data points” before delivering loans to either of the government-sponsored enterprises.
The UCD is a reference file that lenders use to share key information about a mortgage loan with organizations like Fannie Mae and Freddie Mac, particularly about the Closing Disclosure (CD) that outlines the final details of a mortgage loan.
To “improve data quality and consistency for single-family loans that the GSEs purchase,” the GSEs announced in August of 2020 that they would begin “a multi-year transition to convert certain edits in their UCD collection solutions from ‘warning’ to ‘critical / fatal.’ The transition is designed to enhance data quality and consistency for single-family loans the GSEs purchase.”
Phase three of the edits was slated to begin in May 2023, but in April was split into two subsets to give lenders “additional time to work with your software provider and analyze your data to resolve high-firing phase three edits.”
An implementation guide released in May 2022 shows that phase three deals with information related to loan costs; other costs; total closing costs; and lender credits.
The GSEs are actively preparing for the next phase of UCD critical edits, phase four. Updated requirements for this phase’s critical edits are expected to be included in the UCD Specification update which is expected sometime in 2024, though a date has not yet been finalized according to the GSEs.
The GSEs are advising lenders and technology partners to anticipate a transition period similar to that of phase three, with the GSEs emphasizing the need for “proactive compliance.”
The mortgage industry has pushed back on the GSEs for the rise in loan buyback requests from loans originated during the pandemic. FHFA Director Sandra Thompson last month said the agency is working to provide more clarity on its framework and use alternatives amid the spike in loan buybacks.
The Federal Housing Finance Agency (FHFA) Director Sandra Thompson said Wednesday that the agency is working to provide more clarity on its framework and use alternatives amid a spike in Fannie Mae and Freddie Mac‘s loan buybacks.
The GSEs’ loan buybacks have been one of the top complaints among mortgage lenders in a near 8% mortgage rate environment. Thompson addressed the issue during a session at the HousingWire Annual conference held Oct. 10-12 in Cedar Creek, Texas.
“We want to figure out a way to balance the repurchase requests and the repurchase alternatives in a way that makes sense for everybody, because I’m very sympathetic to the environment that we’re currently in. But I’m also sympathetic to making sure that we purchase loans that are heavily manufactured in the way our expectations require,” Thompson said.
According to Thompson, the loan repurchase framework was implemented nearly 10 years ago – the first thing she worked on when she started at FHFA. However, after record volumes of loans purchased by the enterprises in 2020 and 2021, there was an increase in repurchase requests in 2022.
“But I do realize that we’re in a completely different interest rate environment now. And repurchasing those loans in this high-interest rate environment certainly causes losses,” Thompson said.
She continued, “So, we’re working with the enterprises to look at how can we provide clarity[on the framework] (…) We want to make sure that we have quality loans. And that’s true on both sides.”
Thompson said she thinks not every repurchase request “either has or should end up with a repurchase.”
“Because every single defect is not a major defect. There could be some way or alternatives to repurchase that need to be considered,” Thompson said. “For example, if we’re talking about income, you may have more information that can help support a DTI[debt-to-income ratio] (…) There may be supplemental information that comes to the enterprise after the fact that probably should have met with the loan file. “
Technology also has a vital role in this discussion.
Thompson said, “If there are tools that can be helpful to the QC [quality control] process, that certainly would be helpful sooner rather than later.”
Thompson added, “It helps when you have some experience of people engaging with the enterprises on these processes because what I’ve heard is, in some cases, this isn’t always true.”
During the session, Thompson said that “there is urgency” on the loan repurchase matter.
“From my perspective, the repurchase request has gone down since the early days of 2022. It takes about six months after a loan is delivered for the processes to take place. And so we are seeing a downward trend in terms of repurchase requests.”
She added, “But what I would like to get in place is our repurchase alternatives and making sure that both parties – enterprises and the sellers – have a good understanding of what the requirements are.”
Regarding lenders’ vociferous complaints about increased loan buybacks from Fannie Mae and Freddie Mac, FHFA Director Sandra Thompson said the regulator expects originators to deliver loans consistent with the guidelines. But, she added, the Enterprises must implement a fair, consistent, and predictable process for identifying loan defects and the appropriate remedies.
“After multiple years of record-high loan volume, we have seen an increase in the absolute number of repurchase requests – which is to be expected,” Thompson said at the Mortgage Bankers of Association conference in Philadelphia on Monday. “The good news is that there has been a large decrease in repurchase requests since their peak in early 2022, as the Enterprises have worked through loans originated during the refinance boom.”
Thompson said Fannie Mae and Freddie Mac have closely examined their existing processes and practices, including efforts to improve language in the selling guidelines and provide more consistent feedback to lenders on buybacks. The goal is to lead to less ambiguity in underwriting.
In addition, the FHFA is open to additional options that would ensure alternatives to repurchases are available and offered regularly. However, “work on this front remains ongoing,” according to Thompson.
“While many of the details remain in development, we are considering initiatives to test and learn from various options for performing loans with defects,” Thompson said. “Taken as a whole, we believe these are meaningful improvements to uphold quality control while ensuring high-quality underwriting.”
Freddie Mac on Monday said its research shows that purchase mortgages have 35% more incidence of defects than refinancings. It cited loans missing key documents or those with inaccurate income calculations as the top factors.
“To address these issues, Freddie Mac committed to enhance our communication, collaboration and feedback with our lenders and industry partners. We also committed to enhancing our own processes. We did both, and it is working,” the GSE said in a prepared statement Monday. “Non-Acceptable Quality rates on our incoming loans are approximately 30% lower than their peak. With it, repurchase requests are trending down to approximately 60% lower than their peak. Within that 60%, repurchase requests to vitally important small and community lenders are even lower, down 68%.”
Freddie said it has made strides for three reasons: because loan file quality from lenders has improved; the GSE itself has improved the quality control review function; and Freddie has also advanced policy changes “that will minimize instances where judgment must be applied in the underwriting process.”
In a statement following Thompson’s remarks on Monday, the MBA said it has “advocated strongly” for FHFA to address the rise in loan repurchase requests, especially for performing loans and those with relatively minor issues underwritten during the pandemic.
“We share FHFA and the GSEs’ goal of high-quality underwriting and will continue to work with them to ensure the rep and warranty framework is being applied in a balanced way, and that there are appropriate alternatives that lead to outcomes short of a repurchase request.”
Another trade group, the Community Home Lenders Association, weighed in on Thompson’s remarks.
“More balance in repurchase demands is needed to reduce disincentives for lenders to originate mortgage loans to underserved borrowers,” said Scott Olson, the group’s executive director. “It is also necessary to avoid steep and unnecessary losses lenders are experiencing from selling off performing loans in a market with skyrocketing mortgage rates.”
LAS VEGAS – With mortgage rates headed to 8%, the current housing slump is unlikely to reverse course until 2025, due to the Federal Reserve’s continued ratcheting up of interest rates, mortgage experts said at a conference in Las Vegas.
Analysts continue to warn about overcapacity in the industry with too many lenders and employees to support current origination volumes.
Federal Reserve Chair Jerome Powell signaled last week that interest rates need to stay higher for longer to tame inflation and that it could raise interest rates once more this year. The Fed’s policies have hit potential homebuyers the hardest as mortgage rates approach their highest levels in 23 years, analysts said.
“If the Fed keeps rates where they are today, then I think you’re going to easily see 8% mortgages because the survivors in the mortgage market — once we get rid of another 50% of capacity — are going to want to make money and that’s how they’re going to do it,” said Christopher Whalen, chairman of Whalen Global Advisors, on Tuesday at the National Mortgage News Digital Mortgage conference in Las Vegas.
Mortgage industry analyst Christopher Whalen, left, and Julian Hebron of the Basis Point, center, discuss housing policy with the former head of the Federal Housing Finance Agency Mark Calabria, right, during the National Mortgage News Digital Mortgage Conference on September 26 at the Wynn Resort in Las Vegas.
Whalen was joined by Mark Calabria, a senior advisor at the Cato Institute and the former director of the Federal Housing Finance Agency, in a debate about current public policy and its effect on the mortgage market.
Calabria said the main obstacle to buying a home is finding a house that is affordable. He questioned the Biden administration’s public policy approach, which is focused primarily on providing access to credit to low and moderate-income communities at a time when mortgage rates are above 7% and home prices are still rising due to a lack of inventory.
“There’s just too much tension in Washington where the sense is that we’re going to make the mortgage market and mortgage policy the answer to all these other unrelated things which are real — there are very real social injustices we should fix — but the mortgage market is not the solution for all of them,” Calabria said. “I worry that mortgage policy is bearing the weight of trying to fix a number of things that really have very little to do with the mortgage markets.”
Calabria, the author of “Shelter from the Storm: How a COVID mortgage meltdown was averted,” described how he resisted repeated calls for a bailout of mortgage servicers early in the pandemic. The Federal Reserve had stepped in with a broad array of actions including lowering interest rates, sparking a massive refinance boom in 2020 and 2021. Calabria then applied an adverse market fee to refinances but exempted lower-income borrowers.
Julian Hebron, founder of the Basis Point, a consulting firm, and veteran mortgage executive, questioned whether the FHFA should be setting pricing in the mortgage market and asked whether it’s “appropriate for GSEs to raise fees to build capital to prepare for downturns.”
Calabria said the government-sponsored enterprises should be charging so-called g-fees for guaranteeing the timely payment of principal and interest on mortgage-backed securities because doing so covers projected credit losses from borrower defaults over the life of a loan.
“Ultimately, I don’t think the regulator should be driving prices,” Calabria said.
He also said Fannie Mae and Freddie Mac will remain in conservatorship for the foreseeable future but also envisions a way out of government control — by having the GSEs raise fees.
“If you’re a CEO of one of these companies, it sucks being micromanaged, and I know that as somebody who micromanaged the CEOs,” he said. “If I was the CEO of one of these companies and I had the freedom to do it, I would jack up G-fees so I can build capital and get out two or three years earlier than I would otherwise. Because again, it sucks being in conservatorship for these companies, at least at the top.”
Calabria took office in 2019 and sought to end government control over Fannie Mae and Freddie Mac, which guarantee 70% of the roughly $12 trillion U.S. mortgage market. Though Calabria was confirmed by the Senate to a five-year term, he was fired in 2021 by President Biden following a Supreme Court ruling. Biden named Sandra Thompson as Calabria’s successor.
Whalen laid the blame for the current high interest rate environment squarely on the Fed and its actions in dropping rates in response to the pandemic. Roughly 90% of homeowners currently are locked in to mortgage rates below 6% and many are paying less than 4% on loans that were refinanced when the Fed held interest rates near zero. As a result, homeowners are not selling their properties, resulting in record-low inventory and a general gumming up of the mortgage market in a high-rate environment.
“The trouble is that the Fed’s actions through COVID distortéd the market so much that lenders are losing 200 to 250 basis points on every loan they make,” said Whalen. “Even though the agencies and the FHA subsidize the cost of mortgages, that’s really what they do, it’s not about getting a mortgage, it’s about how much does it cost every month, which goes across every product in America.”
Many forecasts that are well-founded in data have been upended by major events, such as COVID or a bank failure. Whalen said that the only way mortgage rates could get down to 6% or 6.5% in the near-term is if there is another bank failure.
“If we see another surprise in the banking market, the Fed is going to be forced to back off,” said Whalen, adding that he is concerned that interest rates are making asset prices go down. “If we see another failure, they are going to probably have to turn to the Treasury for support or tax the industry to raise cash because there won’t be three or four buyers out in the room.”
The regulator overseeing Fannie Mae and Freddie Mac has introduced some new wiggle room into their deadline for modernizing credit reporting and scoring.
The Federal Housing Finance Agency in announcing the next stage of the project on Monday left open-ended the date for a planned transition that will give lenders the option to use reports from two rather than three companies on loans sold.
The FHFA said it now expects that “the implementation date for this bi-merge requirement will occur later than the first quarter 2024, as was initially proposed.”
The first quarter of 2025 remains the end-date on the timeline, but the FHFA noted in its latest update that deadlines could change in the future, confirming previous statements it’s made.
It also said it would offer more opportunities for public dialogue as stakeholders debate how fast the initiative should move forward. Some in the industry are urging deliberation to account for the way credit reporting and scoring is interwoven with a highly regulated mortgage process.
“FHFA’s reformulated implementation plan is an acknowledgment of the significant operational complexities and the magnitude of this effort on the housing finance system,” said Bob BroeksmitBob Broeksmit, president and CEO of the Mortgage Bankers Association, in an emailed statement.
The Community Home Lenders of America said the additional opportunities for engagement FHFA and Director Sandra Thompson extended were welcome given mortgage industry concerns about the process.
“CHLA commends Director Thompson for announcing public listening sessions on the transition to updated credit score models and credit report requirements for loans,” the CHLA’s Scott Olson said in an emailed statement. Olson is CHLA’s executive director.
VantageScore, one of the two entities providing the updated scores with the aim of identifying mortgage-ready borrowers that the current methodology overlooks, urged the FHFA not to delay the change that was legislatively mandated in 2018 beyond another two years.
“We will assist all mortgage originators to get an immediate start using VantageScore 4.0,” said Tony Hutchinson, senior vice president, industry and government relations, in an email. “Every day of delay is another day that working people who pay their bills on time are unable to get a mortgage.”
The Community Home Lenders of America (CHLA) this week submitted a letter to the Federal Housing Finance Agency (FHFA) in response to a recent request for input (FRI) on GSE single-family pricing framework. Its message? The trade group asked the regulator to “make no further changes for an extended period of time.”
The original RFI published in May was designed to gather public feedback on goals and policy priorities the agency should pursue in its oversight of the pricing framework.
CHLA says that its recommendation comes from the idea that “Enterprise pricing changes can create short term transition risk for lenders as they approach dates where prices change and that frequent pricing changes can pose a cost and resource burden on lenders, particularly with respect to necessary IT changes,” the letter said.
Because of this, CHLA says it would be “comfortable” if guarantee fees and loan-level pricing adjustments (LLPAs) remained at current levels for a “significant period of time,” which they define as through the end of 2024.
CHLA, which represents smaller lenders, said it continues to be “extremely critical” of a move by Congress at the end of 2021 to renew a 10 basis point increase to mortgage fees that Fannie Mae and Freddie Mac indirectly charge to consumers. The additional revenue generated by these fees was allocated for infrastructure spending.
The organization is critical of the move because “the proceeds of such fee collections [are] being used solely to pay for non-housing federal expenditures under the federal budget process,” the letter said. “This is a much broader concern than just Enterprise loans. CHLA has long been a vocal critic of budget and appropriations actions and rules under which federal agency mortgage loan fees are diverted to pay for non-housing spending.”
Because of that, CHLA is renewing its request to rescind the 10 basis point increase.
After expressing appreciation to FHFA for Preferred Stock Purchase Agreement (PSPA) changes that established guarantee fee parity, CHLA requests that such parity be extended to mortgage insurance pricing, and that a recent 400% increase by FICO for its credit scores should be scaled back to align more consistently with inflation.
“[FHFA] should direct FICO to eliminate the preferential pricing it arbitrarily gave to a select group of 54 lenders,” the letter said. “It is reasonable for FHFA to take such action, since FHFA requires a credit score on all Enterprise loans.”
Proposed LLPA changes to conventional mortgages initially announced in January have been a source of controversy. The mortgage industry itself expressed nervousness at the prospects of the changes, and an uproar eventually led to a sustained front of opposition by lawmakers in the U.S. House of Representatives which introduced a bill designed to block such changes from going into effect.
The changes specific to conventional borrowers with debt-to-income (DTI) levels at or above 40% were ultimately rescinded, but not before House Republican lawmakers took aim in a House Financial Services subcommittee hearing and an additional hearing with FHFA Director Sandra Thompson as a witness.
“I want to be very clear on one key point, and one that bears repeating: under the new pricing framework, borrowers with strong credit profiles are not being penalized to benefit borrowers with weaker credit profiles,” Thompson said during the hearing. “That is simply not true.”
The Housing Policy Council (HPC) is urging the Federal Housing Finance Agency (FHFA) to modify its proposed government-sponsored enterprises (GSEs) single-family pricing framework, including coordination with banking regulators to streamline capital requirements and retention of upfront guarantee fees.
The original request for input published in May was designed to gather public feedback on goals and policy priorities the agency should pursue in its oversight of the pricing framework. FHFA also sought input on the GSEs’ single-family upfront guarantee fees and whether to continue linking those fees to the Enterprise Regulatory Capital Framework (ERCF).
HPC, in its comment letter, expressed support for the ERCF, suggesting the agency also require pricing levels that will let enterprises earn target rates of return over a reasonable period of time.
The Council also noted that the RFI did not address the financial benefits and operating advantages that Fannie Mae and Freddie Mac derive from their government-sponsored status.
The enterprises, said HPC, “are advantaged by a lower cost of debt financing and a lower cost of capital.” A borrower subsidy, HPC argues, is directly descended from such charter privileges enjoyed by the GSEs.
HPC also suggested that FHFA retain upfront guarantee fees, since it sees those fees as a critical post-financial crisis safety and soundness reform measure. FHFA, it noted, should continue to calibrate risk-based pricing to the ERCF. Meanwhile, the cross-subsidization model is not working as intended and actually contributed to GSEs’ failure in the run-up to the 2007-08 financial crisis, the Council said.
The ERCF, which was established in 2020, has a “significant impact on the risk-based pricing component of the enterprises’ guarantee fees,” the FHFA said in its May RFI. The FHFA began using the ERCF to measure the profitability of new mortgage acquisitions in 2022.
FHFA Director Sandra Thompson said the RFI was issued to increase transparency.
“FHFA seeks input on how to ensure the pricing framework adequately protects the enterprises and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” she said.
Teresa Bryce Bazemore, President and CEO of the Federal Home Loan Bank of San Francisco, announced her intention to retire after her current contract expires in 2024. The Home Loan Bank of San Francisco came under heightened scrutiny for issuing advances to Silicon Valley Bank and Silvergate Bank before they went defunct earlier this year.
Alex Lowy
Teresa Bryce Bazemore, who held a front-row seat during the bank liquidity crisis this year as president and CEO of the Federal Home Loan Bank of San Francisco, plans to retire when her term expires in 2024, citing personal reasons.
The San Francisco bank’s board chose not to renew Bazemore’s contract after she asked to retire in 2025, though her contract expires in 2024. The board instead initiated a search for a new CEO, said Simone Lagomarsino, the board’s chairman, who also is president and CEO at Luther Burbank Savings.
Bazemore “indicated that, due to personal and other considerations, she would like to retire in March 2025,” Lagomarsino said in a press release. “As a result, and in consultation with Teresa, the board has decided to move forward with a search to identify a new CEO who will deliver long-term continuity and engaged leadership.”
The decision followed “extensive deliberation and discussion” about the Home Loan bank’s long-term goals, including “the implementation and integration of strategic changes that may arise from the ‘FHLBank System at 100’ review currently being conducted by the Federal Housing Finance Agency,” Lagomarsino said in the release. “The board recognized the critical importance of a CEO who would be engaged for the next several years to lead the organization forward and implement a vision and strategy to align with the outcome of the FHFA’s review.”
The San Francisco Home Loan Bank played a central role in the bank liquidity crisis in March, when it served as lender of next-to-last-resort to Silicon Valley Bank, which was taken over by the Federal Deposit Insurance Corp. and ultimately sold to First Citizens BancShares in Raleigh, N.C. Other major borrowers of the San Francisco Home Loan bank this year included San Francisco-based First Republic Bank, which was sold to JPMorgan Chase in May, and Silvergate Bank of La Jolla, Calif., which self-liquidated in March.
Last year, Bazemore earned $2.4 million, which included a base salary of $910,000 and other incentive compensation. When she joined the San Francisco Home Loan bank in 2021, she received a $100,000 signing bonus. Her employment agreement provides for 12 months of severance pay, equal to her base salary, plus other awards, according to the Home Loan banks’ combined financial report for 2022.
Last year, the Federal Housing Finance Agency that oversees that Home Loan bank system, launched a holistic review of the government-sponsored enterprise, its first in 90 years. Critics have questioned the system’s hybrid public-private business model and whether the banks are engaged in the primary mission of supporting housing. FHFA Director Sandra Thompson is set to issue a report with policy and congressional recommendations sometime later this year.
Separately, Fitch Ratings on Thursday downgraded certain ratings of the Federal Home Loan banks of Atlanta and Des Moines citing the “high and growing general government debt burden,” of the U.S. government. The ratings actions followed the downgrade of the U.S. to ‘AA+,’ from ‘AAA.’
The Home Loan banks are bank cooperatives that provide low-cost funding to 6,500 members including banks, insurance companies and credit unions. Created in 1932 to bolster housing during the Depression, the system incentivizes banks to buy mortgage-backed securities and agency bonds that can be pledged as collateral in exchange for liquidity.
