Cost of GSEs' mortgage market support may be too steep for lenders
WASHINGTON — Lenders welcomed the Federal Housing Finance Agency's recent announcement that Fannie Mae and Freddie Mac can buy loans already in forbearance, but that relief comes with a catch.
Originators are now weighing whether the plan makes sense for them after learning that Fannie and Freddie will charge a fee for taking on more risk. The fee, known as a loan-level price adjustment, is 5% of the unpaid principal balance for first-time homebuyers and 7% for all others.
The new cost adjustment, which was developed in consultation with the FHFA, is yet another challenge for lenders as the government encourages forbearance for borrowers coping with the coronavirus pandemic.
Normally, borrowers would be on the hook for additional fees tacked onto a loan. But in this case, since loans in forbearance will have already closed, the lender is responsible for the loan-level price adjustment. The fees Fannie and Freddie have set could be too high to provide any relief to lenders at all.
“FHFA is trying to have it both ways,” said Laurence Platt, a partner at Mayer Brown. Backing loans during a pandemic is a public good, he said, but Fannie and Freddie are still in a fragile state more than 11 years after the government seized them during the 2008 mortgage crisis.
“On one hand, they're trying to act in line with their public purpose in buying loans subject to forbearance," Platt said. "On the other hand, they're trying to act like a company in conservatorship by pricing those loans in a way that makes it unattractive.”
FHFA Director Mark Calabria has made clear his view of how the government-sponsored enterprises should behave while they are in conservatorship, and has said that he doesn’t believe it is their responsibility to assist mortgage companies facing a liquidity crunch due to the coronavirus pandemic.
Instead, he is focused on building up the capital cushions at Fannie and Freddie, which pale in comparison to financial companies of similar size. Right now, the companies are permitted to hold a combined $45 billion in capital, and can access a credit line at the Treasury Department if their own capital is depleted.
Buying loans in forbearance could very well set Fannie and Freddie up for losses, which is likely the reason the GSEs are imposing the high loan-level price adjustment.
“It's definitely related to the heightened level of risk that they're taking by purchasing these loans, and that's in the first place why their charter does not allow it,” said David Merkur, an attorney in Greenspoon Marder’s Financial Services practice group.
“There is a heightened level of risk for them that these loans will either maintain a delinquent status or trend into a delinquent status from forbearance,” he said.
The FHFA announced on April 22 its new policy allowing the GSEs to back loans in forbearance. Fannie and Freddie outlined the loan-level price adjustments on their websites shortly thereafter.
The GSEs said the fees were priced as such to “address the risk of these temporary measures” and to protect taxpayers.
Balancing the safety and soundness of Fannie and Freddie while at the same time fulfilling the companies’ original purposes of expanding the secondary mortgage market is no easy feat, particularly in the midst of a global pandemic. Lenders of all sizes are urging the FHFA to focus on the latter.
“By imposing these loan-level pricing adjustments, it undermines the public purpose, but again, it furthers that conservatorship purpose,” said Platt. “And so the question is in a time of crisis, which of those two purposes should prevail?”
Additional fees or charges associated with selling loans to the secondary market make it more challenging for lenders to ensure that they have ample liquidity to continue lending during a downturn, said Ann Kossachev, director of regulatory affairs at the National Association of Federally-Insured Credit Unions.
“We certainly understand that Fannie and Freddie have their own capital constraints and are facing challenges as a result of the pandemic just like everyone else,” she said. “But when we see policy decisions like this from the regulators, that makes it a little harder, especially in an economic crisis.”
Although the fees attached to loans in forbearance likely reflect the FHFA’s estimate of default as well as the possibility of a distressed housing market going forward, the originators' price tag for Fannie and Freddie to purchase these mortgages is still “hefty,” JPMorgan Chase analysts wrote in an April 24 note.
“A 7-point LLPA charge would effectively erase any gain on sale the originators expect on new production loans,” they said. “With the prospect of losses, we believe lenders would create credit overlays to limit this outcome.”
The FHFA's policy allowing Fannie and Freddie to purchase loans in forbearance aims to address concerns that the pandemic crisis will lead to severe mortgage market contraction. Before the agency's announcement, lenders tightened some of their standards as they braced for skipped mortgage payments and the prospect of no GSE backing.
“If a lender can't make any money making the loan, then they're not going to make the loans,” said Platt. “So at the end of the day, it depends on whether the consequence of these loan-level price adjustments is to make origination a nonprofit business.”
The Mortgage Bankers Association implored the FHFA to adjust its policy to ensure that it wouldn’t “constrain credit availability, noting that the agency’s pricing regime could “perpetuate ... more restrictive credit terms.”
“Lenders have already been forced to increase costs and tighten underwriting requirements to account for situations in which they cannot sell loans due to borrowers availing themselves of the forbearance options that FHFA introduced,” MBA President and CEO Robert Broeksmit said in a statement.
Because lenders won’t be able to pass on the costs of the loan-level price adjustment to borrowers, they will have to make up those costs elsewhere.
“That's going to mean it's going to be more expensive for borrowers to get access to credit,” Kossachev said. “And for lenders to make those loans, they're going to potentially need to increase rates across all loans to make up the difference for those loans that have entered into forbearance before delivery.”
The new fees could end up being cost-prohibitive for many lenders, agreed Merkur.
“The increased percentages … [are] going to be a large cost that is definitely going to cut into the intended assistance to banks, lenders and servicers alike,” he said.
Still, what is important now is that there is at least a mechanism in place for lenders to be able to deliver loans in forbearance to Fannie and Freddie, and the details could get ironed out later on, said Dan Sogorka, the president and CEO of Sagent, a mortgage servicing fintech.
“The hot topic of the day is really finding the balance between affordability and the LLPAs for homeowners in forbearance, and that's a risk-reward scenario,” he said. “It's really hard to get a regulation perfect, especially as data is occurring in real time.”
Meanwhile, with another mortgage payment due date just around the corner on May 1, the industry is bracing itself for yet another bump in forbearance requests. It remains to be seen if lenders have the capacity to continue lending at the same time they are paying extra costs for loans in forbearance.
“They might have to make some difficult decisions in how they would lend, which is not something that they want to do right now and during this difficult time,” said Kossachev. “It would be great to be able to offer access to credit to as many members as possible, but this is going to make it harder for sure.”