WASHINGTON – Fannie Mae and Freddie Mac’s government oversight reforms announced in the final days of the Trump administration have come under fire as lenders, housing advocates and others blame one of the changes penalize minority borrowers.
Critics focus on a provision that caps the amount of “high risk” loans that Fannie and Freddie can purchase. The new policy defines these mortgages based on loan-to-value and debt-to-income ratios, as well as the borrower’s credit rating.
Many in the lending industry and elsewhere say the changes will disproportionately harm people of color who will have a harder time to cash in 24 hours or less.
“Objectively, looking at these limits on the LTV, DTI and FICO scores, they seem to run counter to the missions of Fannie and Freddie,” said Ann Kossachev, director of regulatory affairs at the National Association of Cooperatives. federally insured credit. . “If the mission is to ensure access for all Americans … then that defeats the purpose.”
Some have also criticized restrictions in the new agreements that limit the size of transactions made through the GSE treasury window. Small lenders can use the window to earn cash through larger sales.
In January, days before President Biden took office, former Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency director Mark Calabria agreed on changes to the agreements. purchase of preferred shares, which govern the trusteeship of government-sponsored companies.
The changes allow Fannie and Freddie to keep all of their profits until they meet the requirements of the FHFA’s new capital framework, which is seen as necessary for companies to eventually re-enter the private sector.
But the agreements also contained several restrictions on the business practices of GSEs, including limiting their purchases of high-risk single-family mortgages to 6% of their total portfolio and high-risk refinances to 3%. Under the new PSPA agreements, a loan is considered high risk if two of the following conditions apply: it is greater than 90% of a home’s value, the borrower’s DTI is greater than 45%, or if the borrower has a FICO below 680.
Home finance experts say that, based on median LTVs, DTIs, and credit scores of black and Hispanic borrowers, the policy will make it harder for people of color to access credit. For example, the median LTVs of black and Hispanic borrowers were each 96.5% – above the threshold – in 2019 data compiled by the Consumer Financial Protection Bureau.
“The limits imposed in PSPAs make little sense,” according to a report released in February by the Urban Institute. “They are not an effective or efficient way for GSEs to manage their risks, but they come at a considerable cost, undermining the capacity of decision makers. support the mortgage market on several fronts. These limits both disproportionately affect borrowers of color and unnecessarily restrict policy choices in the future. ”
This limit is in addition to new capital requirements that force Fannie and Freddie to hold larger cushions for riskier loans, which the Urban Institute said made the new limits “redundant.”
“The FHFA has already implicitly priced mortgage products that are constrained in the PSPA through its final risk-based capital rule,” the report says.
Many industry stakeholders expressed confusion as to which provisions they believe could have unintended consequences.
“All we’ve learned about mortgage underwriting is that it’s a dynamic equation that involves offsetting risk factors, and every time you try to put that in a simple box , you have to look at unintended consequences at best, and ulterior motives at worst, ”said David Dworkin, President and CEO of the National Housing Conference.
Some argue that the limits on high-risk loans in the new agreements as well as the cash-window restrictions could force the Biden administration to revise the preferred stock agreements.
“We think the Biden team won’t want to see Fannie and Freddie give up on supporting minority homeownership,” Jaret Seiberg, analyst at Cowen Washington Research Group, said in a note on the Urban report. Institute. “As such, this suggests that Biden’s Treasury Department will reopen the preferred share purchase deal.”
The result of the new deals brokered by Mnuchin and Calabria could be a wider homeownership gap, said Laurence Platt, partner at Mayer Brown.
“I think the haves will continue to have the privilege of getting loans, and the less wealthy will continue to not have the privilege of getting loans,” he said. “Since there is a greater proportion of potential borrowers of color who are less wealthy, I think this will have an impact on their access to credit.”
Meanwhile, under the agreements, starting next year, Fannie and Freddie won’t be able to acquire more than $ 3 billion combined from a single seller through the cash desk, which lowers the price of lenders to sell loans directly to GSEs. Industry experts say this could prevent some lenders from doing business with GSEs.
Instead of placing limits on the high-risk loans Fannie and Freddie can buy, the FHFA could have relied on its own capital framework and oversight capabilities to keep businesses safe and sound, Pete said. Mills, Senior Vice President of Mortgage Bankers. Association.
“All these caps, both on the product and on the cash desk, are all issues that are and probably should continue to be addressed by means of oversight by the FHFA, and then also, by how the rule of the capital works, ”he said.
The additional limits are “counterintuitive,” acknowledged Ron Haynie, senior vice president of mortgage finance policy at Independent Community Bankers of America.
“Product restrictions and cash box restrictions and high risk restrictions – it just doesn’t make sense,” he said.
In a statement, the FHFA said Calabria “appreciates the issues raised in the Urban Institute document”.
“He looks forward to having discussions on the steps that can be taken to strengthen businesses so that they can serve the market through good times and bad,” a spokesperson said. “It is important to note that the biggest strain on the credit box is the lack of capital in the businesses, which the PSPA is helping to build.”
The FHFA spokesperson said the restrictions on high-risk loans and the use of the cash window were insisted on by the Treasury Department, which at the time was headed by Mnuchin.
This could open the door for a review of PSPAs under current Treasury Secretary Janet Yellen, if she supports a different approach.
“There are opportunities to further modify PSPAs. They just have to agree on it, so some of these changes could certainly be reversed in the future, ”Kossachev said. “It’s not set in stone. The PSPAs have been changed several times now, so it could happen again. ”
In particular, Mills said he could see the Biden administration revisiting the cap on the use of the cash kiosk, which he called “a solution in search of a problem.”
The Urban Institute has expressed concerns that the cap could undermine the single security that Fannie and Freddie began issuing in 2019 in a bid to increase liquidity and encourage market participation.
“If you take out the big guys who are able to sell in the cash window, you’re going to reduce the diversity of those pools, and that will impact the pricing,” Haynie said.
Kossachev added that restrictions on the cash window could limit the capacity of small lenders “who seek to serve the poorest communities.”
“Fair pricing and equal access – these are our core principles, and we just want to make sure that ongoing administrative reforms at FHFA and with the Treasury keep these principles at the forefront,” she said.
Platt said that the FHFA and the Treasury may have failed to strike a balance between the need for GSEs to raise capital and the need for GSEs to fulfill their public mission of making home ownership affordable and accessible.
“On the one hand, public policy is actively trying to find ways to improve access to credit for this emerging population, and yet, at the same time, it must be balanced with the risk of loss,” he said. he declares. “It seems to defeat this larger public policy goal of giving responsible credit to people who haven’t been able to get it in the past.”