FHFA Faces Tricky Balancing Act over Credit Availability

WASHINGTON — The Federal Housing Finance Agency is in an uncomfortable spot in 2015, caught between a Republican majority already critical of its recent actions and an Obama administration bent on increasing access to credit in part by using the agency's powers.

FHFA Director Mel Watt is expected to begin his year sitting in front of the House Financial Services Committee, whose Republican leadership wants to grill him about a December decision to require Fannie Mae and Freddie Mac to funnel money to two housing trust funds while they remain in conservatorship. But he will also face questions about new products from the two government-sponsored enterprises that allow them to buy loans with low downpayments - products offered amid pressure from the White House to boost credit availability.

"We are just beginning to see what most likely is stepped-up activities related to the roles of the GSEs," said Edward Mills, an analyst with FBR Capital Markets. Congress' role "will be more on oversight and holding hearings that question Mel Watt more aggressively than in the past."

It is difficult to know which action Republicans are more outraged about. The move late in the year to fund the housing trust funds has drawn considerable ire already from the GOP.

"Money coming from the GSEs should go to the taxpayers instead of slush fund for ideological housing groups housing groups to play around with," said Rep. Ed Royce, R-Calif., in a statement on Dec. 11.

The funds were created by a law in 2008, but were never provided money because soon afterward, the GSEs were seized by the government. Republicans have argued they should not be provided funding as long as the GSEs are in conservatorship.

Financial Services Committee Chairman Jeb Hensarling, R-Texas, accused Watt of waiting until Congress was set to adjourn before announcing his decision in the hopes it would not be scrutinized. He vowed to hold hearings on the issue early in January.

Those will likely be quickly followed by hearings in the Senate Banking Committee, which Sen. Richard Shelby, R-Ala., is expected to chair after the Republicans take control of the chamber. Shelby and other Republicans argue the monies Fannie and Freddie are sending to the funds should be used instead to pay back taxpayers.

"I strongly oppose Director Watt's decision and will continue to fight to protect taxpayers," Shelby said in December.

He is joined by Sen. Bob Corker, R-Tenn., and other Republicans on the panel.

"It is beyond irresponsible to restart these affordable housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac," said Corker in a statement. "These two entities would not be generating one penny of revenue without taxpayer backing, and until the American taxpayers are taken off the hook for a future bailout, FHFA should continue to suspend payments to these funds."

But Republicans are also furious about the new Fannie and Freddie programs to buy loans with downpayments as low as 3%.

Watt's policy is an invitation to return to the "slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy," Hensarling said when they were announced in Nov. 7. They "must be rejected."

Analysts said they expect GOP lawmakers to push back hard on that issue.

"They will go after the 3% down payment programs at Fannie and Freddie," said Basil Petrou, managing partner at Federal Financial Analytics.

To be sure, Watt knew the political firestorm he was going to set off with both decisions. He is a former congressman from North Carolina and a longtime member of the Financial Services Committee.

But Watt has been facing pressure from the White House and housing and financial services industry groups to find way to expand credit. The new 97% and 95% loan-to-value ratio loan products, which are open to first-time homebuyers, are seen as a key way to do that.

"I do believe there is an absolutely genuine intention to help lenders begin to lend again and provide greater access to credit," said Richard Dugas, the chief executive of Pulte Homes, in a public meeting with investors on Dec. 9.

Dugas, along with other homebuilder executives, met in Washington with administration officials in November to discuss credit issues and strategies for increasing the number of first-time homeowners.

Debra Still, the CEO of Pulte Homes Financial Services, said at the same meeting that there is a "significant concern that qualified borrowers aren't getting the appropriate access to credit in today's environment."

Tight Credit and Low Demand

It's unclear, however, if the new products from the GSEs will be enough to jumpstart the housing industry, which has served as a drag on the overall economy.

Michael Fratantoni, an economist with the Mortgage Bankers Association, said he expects lenders will originate $1.2 trillion in 1-to-4 family mortgages in 2015, up just 6% from 2014.

Originations in 2014 were the "lowest in 14 years and 2015 is going to be marginally better," Fratantoni said.

Economists at Wells Fargo Securities said that the improving economic conditions should bring more buyers and sellers into the housing market.

However, the homeownership rate has fallen to 64.4%, the lowest in 19 years.

"We expect the homeownership rate to fall further and over-correct due to the persistence of tight mortgage credit, changing attitudes towards the homeownership and still stressed household balance sheets," the Wells' economists say in their Dec. 17 Housing Chartbook.

Watt has taken several other steps during his first year as director that are designed to free up lending. Fannie and Freddie have issued new representation and warranty guidance to provide lenders with greater clarity regarding loan buyback risk. The hope is that the new guidance will give lenders more confidence in originating Fannie and Freddie loans. And they will reduce their credit overlays that have restricted lending to the most creditworthy borrowers.

"I think the new rep and warrants have given lenders more certainly surrounding buybacks," according to Sam Khater, the deputy chief economist at CoreLogic.

But he doesn't think it will make much of a difference in terms of origination volumes.

Khater said that lending standards are "only really tight" with respect to credit scores — not when it comes to debt-to-income or loan-to-value ratios.

The real issue is loan demand and stagnant incomes, Khater said at a housing panel discussion on Dec. 4 that was sponsored by S&P Dow Jones.

"You can't underwrite your way out of an economy where incomes have remained flat over the past 20 years," he said.

But some industry representatives remain hopeful that the new low downpayment products can help.

They "priced it pretty aggressively for better quality borrowers," said David Stevens, the president and chief executive of MBA. "There is a lot of interest in the industry to offer that product."

G-Fees and Mortgage Insurance

Two other major policy decisions facing FHFA in 2015 will be the pricing of loan guarantee fees and setting capital requirements for private mortgage insurance companies.

FHFA sought input on Fannie and Freddie guarantee fees in June and input on draft capital requirement for mortgage insurers in July.

Since then, FHFA has delayed the issuance of the mortgage insurance capital requirements, which the agency calls "private mortgage insurance eligibility requirements" or PMIERS. FHFA's new timetable for issuing the capital standards is the end of March.

All of those initiatives will affect the "availability and cost of mortgage credit," said FBR's Mills.

FHFA appears to want to finalize PMIERs first before making any final decisions with respect to the guarantee fees and loan level price adjustments (LLPAs) that Fannie and Freddie will charge going forward.

"They got to figure out PMIERS and the capital requirements first," Still said at the PulteGroup's investor meeting.

Separately, Patrick Sinks, the president and chief operating officer of Milwaukee-based MGIC, said that capital requirements will "clearly impact" the amount of new 97% LTV loans his mortgage insurance company will insure.

"If PMIERS were approved as [first] proposed, there is a possibility that we and the other private insurers may have to increase their prices," he said at a Goldman Sachs financial services conference on Dec. 10.

Former FHFA Director Edward DeMarco implemented several guarantee fee increases over the past three years. The hikes were put in place to ensure the fees were adequate to cover loan losses and to draw more private capital into the mortgage market.

Freddie currently charges a 57.2 basis-point guarantee fee on its single-family loans in the third quarter, up from 38.3 basis points in 2012. Fannie charges a 63.5 guarantee fee, up from 39.9 basis points in 2012.

A new report released in mid-December by the Congressional Budget Office says Fannie and Freddie already "charge enough for their loan guarantees to more than cover the projected losses on those guarantees.

"Because policy makers have already raised the guarantees fees … close to those that CBO estimates would be charged by private insurers , the budgetary costs of the two GSEs' activities over the next 10 years are expected to be small," the Dec. 16 report says.

Republican lawmakers supported the fee hikes approved by DeMarco and don't want to see them reduced. Yet lowering guarantee fees could help boost access to credit.

While a decision hasn't been made, the MBA doesn't expect to see much relief in terms of lower guarantee fees.

"I think it will be difficult to do much in the guarantee fee space," Stevens said in an interview. Instead, MBA members are hoping for some relief with respect to LLPAs, which are a form of risk-based pricing that penalizes borrowers with low credit scores that can't afford a significant down payment.

LLPAs are an upfront fee paid at closing and they factored in the calculation of guarantee fees. An LLPA can cost $3,250 on a $100,000 loan for a borrower with a low credit score and little equity.

"I don't think we are going to see LLPAs go away," Still said at the PulteGroup investor day. However, borrowers with 640-659 credit scores and a 20% downpayment pay three times the LLPAs than borrowers with 700-719 credit scores and 20% downpayment. Still said that the LLPAs consumers are paying "far outweigh the amount of risk" in the marketplace. "There is an opportunity to get that calibration right," she said. That is "where the work really needs to be focused."

The MBA's Stevens is hoping to see some reduction in LLPAs.

"If anything, I can see marginal reductions to meet affordability objectives and help expand credit for those who are priced out the market."

In addition to those other issues, the FHFA may face at least one more related to Fannie and Freddie. Reps. Scott Garrett, R-N.J. and Sean Duffy, R-Wis., raised concerns about Fannie and Freddie's "lobbying" activities prior to a Senate Banking Committee vote on a GSE reform bill in the spring.

They claim the GSEs circulated letters to media outlets that warned the bill would raise the cost of mortgage credit. Duffy will chair the House oversight and investigations subcommittee while Garrett chairs the capital markets and GSE panel.

In a letter to Watt sent Dec. 11, they wanted to know if FHFA investigated the letters and what the agency does to ensure the GSEs are not engaging in lobbying or political activities. The congressmen want FHFA to respond by Jan. 7.