By the Numbers
Housing finance | Notes from Washington
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- 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.
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