By the Numbers

The Supreme Court sets change in motion

, and | June 25, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The Supreme Court recently gave President Biden the green light to name a new director of the Federal Housing Finance Agency, and he wasted no time, removing FHFA Director Mark Calabria the day of the court decision and naming FHFA Deputy Director Sandra Thompson as new acting director. This likely marks a shift in policy away from a quick Fannie Mae and Freddie Mac exit from conservatorship and toward affordable housing and broader homeownership. The policy shift stands to affect issuance and pricing in agency MBS and CMBS and in agency CRT and private MBS as well.

The court opened the door to removing Calabria on June 23 by ruling, among other things, in Collins v Yellen that it was unconstitutional for a single director of a federal agency to serve under provisions that allow replacement only for cause. FHFA’s founding legislation includes those provisions, now stricken down by the court. The ruling follows a similar ruling handed down last year striking down similar provisions protecting the director of the Consumer Finance Protection Bureau. The ruling in Collins v Yellen was widely expected.

The market will now need to anticipate the impact of likely policy change on issuance and pricing in several areas:


  • Caps on delivery of loans secured by investor properties and second homes
  • Limits on originator use of the cash window
  • Limits on purchases of loans with layered risks


  • The pace and size of Fannie Mae and Freddie Mac credit risk transfers
  • The flow of agency-eligible loans into the private MBS market


  • Caps on agency CMBS production

Comments on each of these areas from Amherst Pierpont sector specialists follow.

Agency MBS

The January amendments to the Preferred Stock Purchase Agreements are likely to be rolled back if the administration replaces FHFA Director Calabria. The amendments came in the final days of the Trump administration and have proven disruptive to originators and investors. The key items for investors in agency MBS are the caps on cash window purchases, caps on purchases of loans for investment properties and second homes, and caps on purchases of certain high-risk loans. However, a full rollback would require an agreement between the new acting director and Treasury Secretary Yellen, which may take some time to execute.

The Biden administration may have a few reasons to roll back these changes. The cash window and investor loans generate significant revenue for Fannie Mae and Freddie Mac and can help subsidize riskier loans to disadvantaged borrowers. Investment properties also are a source of rental housing, and the administration might worry that rents will increase if caps raise the cost of financing. The caps on high-risk loans could make it more difficult for low-income borrowers to get loans, although the FHA provides an alternate outlet for these borrowers.

There are two recent precedents for rolling back last-minute changes to housing policy. The first occurred in December 2014; FHFA Acting Director Ed DeMarco attempted to raise guarantee fees by 10 basis points and to charge a higher guarantee fee in four states. Incoming director Mel Watt postponed those changes two days after being sworn into office to allow more time for review. They were later discarded. The second incident occurred in January 2016; HUD Secretary Julian Castro lowered FHA mortgage insurance premiums. One of the first acts of the Trump administration was to suspend those decreases, to allow more time for review.  They, too, were later discarded.

An acting director could delay enforcement of the cash window caps until January 1, 2022, the original deadline set in the amended PSPA. Freddie Mac said the FHFA had directed them to start enforcing the caps in July, but that could be postponed. However, any originators that are over the cap need to lower their volume in 2021 if they want to retain access to the cash window at the start of 2022 since the cap uses a four-quarter lookback window. If the cap is not permanently removed before the end of the year, then many large originators could lose access to the cash window.

The caps on investor loans, second homes, and high-risk loans are slated to take effect on July 1. The drafting of the PSPA amendments implies that an acting or permanent director might need agreement from Treasury Secretary Yellen to delay the caps on investor loans. A rollback of the caps should increase the supply of GSE investor loans and decrease the cost of refinancing these loans. Many originators have raised the interest rates offered for investor loans to comply with the caps.

The administration views the GSEs as an important vehicle for enacting their affordable housing goals. This means the White House would prefer the GSEs to have a larger footprint, and many policy decisions may be made in that light. The GSEs face competitive pressures from the private market, which is issuing more deals backed by agency-eligible collateral. The GSEs will have to balance pricing against market share and revenues. That likely constrains them from making across-the-board reductions to guarantee fees. Instead, like Mel Watt’s tenure as director, they are more likely to focus on affordable housing programs subsidized by higher credit borrowers. Therefore, it seems unlikely that a new director will trigger a massive refinance wave by lowering guarantee fees.

— Brian Landy, CFA

Credit risk transfer and private MBS

Either an FHFA acting or permanent director could easily reverse some of the amendments to the Preferred Stock Purchase Agreement struck in January between former Director Calabria and former Treasury Secretary Mnuchin. New amendments could be struck between Acting Director Thompson and current Treasury Secretary Yellen, making it fairly simple to strike down certain features of the amended PSPA.

One such amendment that may get scrutiny is the cap on deliveries of non-owner-occupied loans to the GSEs. Deliveries of those loans are currently capped at 7.0% of total deliveries using a 52-week lookback. To manage to these caps, both enterprises have recently further reduced the amount of these deliveries a single originator may make to each enterprise in a given month. Freddie Mac has enacted a broad-based reduction in delivery caps to 6.5% starting this month and 6.0% thereafter. While it has been reported that Fannie Mae has reduced caps on certain originators to as little as 3.0% per month.

Lifting the caps on these deliveries would likely stem the overflow of agency-eligible investor loans to the private market, increasing the size of the enterprises’ footprint. Changing or removing the caps would likely reflect the elevated Loan Level Pricing Adjustments paid on investor loans and second properties, which provide a valuable source of income useful for cross-subsidizing other initiatives such as affordable housing mandates. However, the case to remove the caps may not be that clear cut. In early conversations with originators following the court’s decision, some expressed that the caps could stay in place or be modified based on the belief that providing financing to more affluent second home owners or investors may be viewed as inconsistent with new enterprise mission directives.

The new director could also revisit existing GSE Loan Level Pricing Adjustments. If existing risk-based were to stay in place, especially on higher LLPA investor loans, some of that supply will likely continue to flow into private RMBS, especially since many originators have had to make investments in alternative forms of execution because of the caps. Additionally, if the GSEs new mandate were to expand affordable housing initiatives, it could potentially drive LLPAs higher for certain borrowers, particularly on those with conforming jumbo balances. Since the start of the year, there has been a steady spate of private MBS deals backed wholly or partly by loans with balances under the GSEs’ jumbo conforming limits. An increase in LLPAs on these loans would like fuel an increase in the supply of these loans to the private label market with the caveat that the enterprises would not want to change pricing so dramatically that it would shift an overwhelming majority of jumbo conforming issuance to private label execution.

The implications of the Court’s decision for the forward supply of GSE CRT are murkier as issuance is intertwined with stickier GSE capital rules. The rules, in their current form, have diluted the capital relief associated with issuing CRT by roughly 50% relative to those proposed in 2018. Due in part to this reduction in capital relief, Fannie Mae has suspended issuance of CRT since the first quarter of 2020. And while certain amendments to the PSPAs may be more easily reversed, changes to the capital rule pose a higher hurdle as they have been published in the Federal Register, are officially enforceable and would require a new draft, proposal and approval before some or the entirety of the existing rule could be reversed.

One potential caveat that could drive CRT issuance higher sooner would be the possibility that FHFA could delay the implementation date of the new capital rule while the current one is under review by newly nominated leadership. There is existing comparable precedent for this as the Consumer Finance Protection Bureau delayed implementation of new Qualified Mortgage definitions and rules prior to implementation. If FHFA were able to delay implementation of the capital rules, the GSEs would likely revert back to the Conservatorship Capital Framework in the interim. An adoption of the CCF would likely pave the way for increased CRT issuance sooner than would otherwise happen under a completely revised capital rule.

Absent the ability to revert to the CCF framework, supply of CRT may continue to be constrained for the near term but could grow quickly if a reversal of the existing capital aligned more closely with the 2018 draft proposal. And while it is difficult to project how new FHFA leadership may view CRT, it seems likely that any new regime should have a more constructive view on the programs than former Director Calabria. It seems plausible that if revised capital rules looked more favorably on CRT, it could encourage Fannie Mae to return to issuing CRT not only on future production but potentially on existing loans held in the guaranty book originated since the beginning of last year, where Fannie is likely still holding the majority, if not all, of the credit risk.

Any intimation that these capital rules may be relaxed would likely be a significant spread widening event for existing CRT as the looming supply technical would likely weigh heavily on spreads. Fannie Mae’s gross issuance of CRT eligible loans since the beginning of last year has totaled just over $1.6 trillion in notional unpaid principal balance. While it’s difficult to ascertain what that translates to in terms of credit risk held by Fannie Mae today given prepayments and potential recapture of those loans over time, it’s plausible that the enterprise may still be holding a substantial amount of the credit risk on their gross issuance since the CAS program was suspended.

A risk transfer of 250 bp on the $1.6 trillion of gross notional would translate to approximately $40 billion in new CRT. According to FHFA, the float of outstanding CRT totaled slightly less than $50 billion as of February of this year. As a result, any meaningful move to transfer this risk to the capital markets could roughly double the outstanding float of CRT. If Fannie Mae were asked to transfer risk on this portion of the guaranty book, Fannie Mae would likely have to do so through multiple channels, potentially relying more on insurance counterparties through their CIRT program and less so on capital markets issuance. And while conservative estimates suggest it could take as long as a year to eighteen months before new capital rules could be formally introduced, issuance may begin to rise ahead of that if it is generally held that new rules appear likely to be enacted or if FHFA is able to delay implementation of the existing rule.

— Chris Helwig

Agency CMBS

There are two primary restrictions the current FHFA director has placed on the GSE’s multifamily business that are explicitly mentioned in the January amendment to the PSPAs:

  • Each GSE is subject to an $80 billion cap on their purchase activity for multifamily mortgages in any 52-week period. Those $80 billion caps for 2020 were lowered to $70 billion for 2021, but the $80 billion amount is written into the January amendments, along with an allowance for the cap to be indexed to CPI on a yearly basis.
  • At least 50% of the multifamily mortgage assets acquired must satisfy their mission-driven guidelines for affordable housing. This amount is written into the January amendments and is up from the 37.5% that was required to be mission-driven in 2020.

These restrictions so far have not had a significant impact on the GSEs multifamily business. Both Fannie and Freddie have been acquiring multifamily mortgages right up to the proscribed caps for the past two years. This could be material going forward, since the growth in the proportion of renters is projected to outpace that of homeowners over the next two decades. These renters are expected to be heavily skewed towards low- to moderate-income households and multifamily tenants. Raising the caps would allow the GSEs to deepen their support of the market, while still fulfilling their mission-driven commitments.

— Mary Beth Fisher, PhD

Brian Landy, CFA
1 (646) 776-7795

Chris Helwig
1 (646) 776-7872

Mary Beth Fisher, PhD
1 (646) 776-7872

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