By the Numbers

Housing finance | Notes from Washington

, , and | October 14, 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.

  • A big jump in the conforming conventional loan limit may kick up political dust for the Federal Housing Finance Agency this fall, but odds of anything but a full lift in the limit look low
  • Nominees to head the Federal Housing Administration and Ginnie Mae should get Senate approval by the end of the year, although timing ultimately depends on the clock after Congress deals with the debt ceiling, infrastructure, reconciliation and other possible legislatives fires
  • The 10 bp fee paid by Fannie Mae and Freddie Mac to the US Treasury for deficit reduction is likely to get reincarnated in proposed spending legislation but otherwise could end up getting allocated by FHFA to affordable housing efforts

A big jump in the conforming conventional loan limit may kick up political dust for the Federal Housing Finance Agency this fall, but odds of anything but a full lift in the limit look low

A nearly 20% year-over-year gain in the most recent CoreLogic and other home price indices point to a jump in the Fannie Mae and Freddie Mac loan limits that could have those agencies guaranteeing single-family loans of nearly $1 million, ripe fruit for critics of government housing subsidies. The current single-family limit in high-cost areas would go from $822,000 to more than $986,000. The agencies already guarantee loans on 2-4-unit buildings of much more than $1 million, which would also go higher.

The statutes and process for calculating conventional conforming loan limits are clear, although nothing prohibits FHFA from exercising discretion. FHFA in the past has considered reducing loan limits. Our sources in Washington say they have not heard discussion of anything but a standard calculation of a new limit, traditionally announced in late November and applicable for loans delivered starting January 1.

FHFA may still have to balance critics of higher limits against home builders, realtors, mortgage originators and other advocates and against the substantial guarantee fee income on larger loans, which could be used to subsidize affordable housing. Acting FHFA Director Sandra Thompson has announced a review of Fannie Mae and Freddie Mac guarantee pricing, which will likely include possible fees on larger loans. Any change in fees on larger loans itself is a balancing act. A material uptick in the cost of financing for more creditworthy borrowers could push more of those loans to private-label channels especially for originators able to easily tap the private-label market.

Assuming a full lift in conventional conforming balances comes through, it should increase the negative convexity of 2022 conventional MBS pools, raise the value of seasoned pools and other specified pools, and increase prepayments in private-label MBS. Fed tapering also removes a key buyer of some of the most negatively convex MBS, leaving this risk in private hands.

Nominees to head the Federal Housing Administration and Ginnie Mae should get Senate approval by the end of the year, although timing ultimately depends on the clock after Congress deals with the debt ceiling, infrastructure, reconciliation and other possible legislatives fires

The Biden administration’s nominees to head both the FHA and Ginnie Mae may be approved by the end of the year, but fights over the timing of the debt ceiling, spending and reconciliation efforts could either pull forward or extend the timeline. The Senate Banking Committee’s vote on the nominee to run FHA, Julia Gordon, deadlocked after Ranking Member Pat Toomey (R-PA) convinced other Republicans to oppose the nomination. Senate Majority Leader Chuck Schumer (D-NY) will now have to take the nomination out of committee and bring it to a floor vote in executive session. The administration’s nominee to run Ginnie Mae, Alanna McCargo, may face an easier path as it appears that Toomey may not block her confirmation. Gordon, a consumer advocate with a progressive bent, once in place, will likely push for broader access to credit and lower FHA fees over time; any decision about fees will likely have to wait until after seeing the effect of the pandemic on FHA borrowers and the agency’s insurance fund. Gordon is widely viewed as having a stronger understanding of mortgage finance than most consumer advocates and as such may take a somewhat measured approach to any progressive initiatives. For her part, McCargo will likely surround herself with key lieutenants to ensure that Ginnie Mae MBS continue to be a stable, liquid product for investors.

The 10 bp fee paid by Fannie Mae and Freddie Mac to the US Treasury for deficit reduction is likely to get reincarnated in proposed spending legislation but otherwise could end up getting allocated by FHFA to affordable housing efforts

The 10 bp fee created by the Temporary Payroll Tax Cut Continuation Act of 2011 (TCCA) expired October 1 but is likely to come back to life in the proposed reconciliation package working its way through Congress. If that package fails to pass, FHFA would have a few options. FHFA could eliminate the fee and reduce mortgage costs for all GSE borrowers. Alternatively, FHFA could keep the fee and use it to help fund down payment assistance, loss mitigation efforts or subsidize private mortgage insurance premiums for high LTV borrowers. One place where the fee seems unlikely to land is in the GSEs’ capital coffers as retained earnings; increasing GSE capital is not a high priority for current FHFA leadership.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

Chris Helwig
chelwig@apsec.com
chelwig

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles