By the Numbers
Housing finance | Notes from Washington
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The pace of change in housing finance policy has picked up with the new administration in Washington, and we decided to put out a set of quick notes each week on key developments. The highlights this week:
- The Federal Housing Finance Agency has put Fannie Mae and Freddie Mac LLPAs under review and may make some targeted changes
- A binding cap on Fannie Mae and Freddie Mac purchases of investor and other loans is likely gone although FHFA may use other means to shape GSE market share
- A reduction in Federal Housing Administration mortgage insurance premiums, although likely off the table this year, could happen next year and might be targeted rather than across-the-board
- The White House has begun reviewing reductions in the housing provisions of the proposed $3.5 trillion spending bill
The Federal Housing Finance Agency has put Fannie Mae and Freddie Mac LLPAs under review and may make some targeted changes
Acting FHFA Director Sandra Thompson told an audience of affordable housing advocates last week that the agency was beginning to review Fannie Mae and Freddie Mac guarantee pricing. The affordable housing community has asked for a dramatic reduction or even an elimination of risk-based LLPAs, but this is extremely unlikely.
A dramatic reduction in LLPAs would entail difficult tradeoffs, including a possible increase in the monthly running guarantee fees that apply to all loans. This could push pricing on low-risk loans into other channels, including private portfolios or MBS, increasing the overall risk of GSE pools and requiring still higher pricing. There is some concern, as well, that cutting LLPAs could push some home prices even further beyond the reach of some potential homeowners. Thompson, as a career regulator, is unlikely to move so aggressively. She is more likely to decrease modestly the pricing curve for LLPAs and perhaps use the pricing review to create targeted subsidies for first-time homebuyers, targeted locations and other traditionally underserved populations. That may include redirecting the 10 bp fee imposed by the Temporary Payroll Tax Cut Continuation Act of 2011 to help reduce the US deficit; the fee expired on October 1.
A binding cap on Fannie Mae and Freddie Mac purchases of investor and other loans is likely gone although FHFA may use other means to shape GSE market share
The recent FHFA decision to suspend binding caps on Fannie Mae and Freddie Mac purchases of investor loans, second property loans and loans with layered risks will likely stay in place for the foreseeable future. Some press reports have suggested the caps might get reimposed. FHFA suspended the caps in part because caps looked like an inefficient way to influence GSE market share. FHFA traditionally has used LLPAs and other pricing mechanism to regulate share and may change pricing. It would traditionally set new LLPAs just below the point that would push the loans into the private market. If FHFA does reimpose a cap, it would likely be well above the level that would limit GSE purchases.
FHFA also suspended the $80 billion caps on multifamily purchases applied separately to Fannie Mae and Freddie Mac, and some reports have suggested the lower $70 billion caps included in the annual FHFA scorecard would apply. That seems unlikely. The new scorecard will likely raise the multifamily cap.
A reduction in Federal Housing Administration mortgage insurance premiums, although likely off the table this year, could happen next year and might be targeted rather than across-the-board
Despite concern in some corners of the market that the FHA will reduce MIPs this year, the over-10% delinquency rate at FHA will likely push any decision into the first half of next year. Many of those loans are in forbearance, and FHA worries many of those borrowers may be unemployed. FHA will likely wait to see results as loans leave forbearance and reassess impact on projected insurance fund capital. Even if losses after forbearance prove manageable and capital projections prove adequate, FHA may weigh cuts in MIPs to targeted groups rather than the across-the-board cuts seen on occasion since 2008. Those cuts could subsidize first-time homebuyers, targeted locations and other traditionally underserved populations.
The White House has begun reviewing reductions in the housing provisions of the proposed $3.5 trillion spending bill
The administration’s proposed Build Back Better Act includes more than $300 billion in housing programs. They are heavily tilted toward repair and renovation of public housing ($80 billion), especially in New York, with the support of Senate Majority Leader Chuck Schumer (D-NY). They are also tilted toward Section 8 vouchers ($90 billion), with the support of Maxine Waters (D-CA), chair of the House Committee on Financial Services. The administration and supporters in Congress are debating whether to cut programs pro-rata or cut only lower priorities. The administration is heavily focused on building affordable housing, through grants, tax incentives and incentives for localities to eliminate the multiple layers of local review and approval for zoning, building and financing multifamily housing.
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