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Given the current housing environment in the U.S., the Federal Housing Finance Agency (FHFA)’s new leader should prioritize the affordable housing footprint across the country, find ways to cut costs in the origination of mortgages and take additional moves designed to mitigate risk.
This is according to the Community Home Lenders of America (CHLA), who submitted a letter with its perspectives to new FHFA Director Bill Pulte on Tuesday.
After congratulating him on his confirmation and expressing its support for the idea that FHFA can act administratively to remove the government-sponsored enterprises (GSEs) from conservatorship, the organization requested Pulte keep the impact of any planned cuts in mind.
“[W]e ask that any cuts in FHFA staff or in Enterprise costs not result in the Enterprises reducing their broad base of seller-servicers — or in a return to repurchase policies for performing loans with technical defects that harmed lenders and borrowers alike,” the letter said. “Further, we believe Fannie [Mae] and Freddie [Mac] can continue to operate in a safe and sound manner — while fully maintaining their affordable housing mission.”
4 key recommendations
The letter goes on to make four key recommendations:
1. The GSEs “should maintain their affordable housing footprint, including condo, investor, and second home loans — without volume caps or fee increases unrelated to risk.”
2. Both companies “should strictly adhere to PSPA cash window requirements — and should not reduce the number of seller-servicers, whether out of convenience or to cut costs.”
3. Fannie and Freddie should “complete the process of replacing repurchase demands for performing loans with loan defects with an indemnification fee based on Enterprise risk.
4. The GSEs should “take actions to cut mortgage origination costs,” including by rejecting the “bi-merge” credit proposal in favor of the tri-merge system accounting for reports from all three major credit rating agencies, while also addressing “FICO’s monopolistic credit score price hikes.”
In January 2021, during the waning days of the first Trump administration, FHFA and the U.S. Department of the Treasury amended Preferred Stock Purchase Agreements (PSPAs) and implemented a volume cap of 7% on the number of single family mortgages by the GSEs secured by investment properties and other properties, including second homes.
“With no other way to ensure compliance with this cap, Fannie and Freddie imposed these caps at the seller-servicer level, on each individual lender,” the letter said. “Moreover, these caps were imposed retroactively, based on the prior 52 week average purchases for each Enterprise.”
This led to lenders — particularly those with a focus on investor loans or those tied to second homes — suspending their abilities to originate qualified investment and second-home loans to the GSEs. Eight months later in Sept. 2021, FHFA suspended the 7% cap and the following January increased guarantee fees on second-home loans.
Filling the affordable housing gap
The overarching objective, CHLA said, was to “reduce the footprint of Fannie and Freddie – and they appear to be based on the premise that banks or the private label securities (PLS) markets would step in to fill the gap,” the letter said.
But there has been a “sharp decline” in PLS and bank mortgage lending since the financial crisis, making it “highly unlikely the resulting affordable housing gap will be filled,” the organization said. On top of this, some loans will simply go back to FHA.
“Therefore, CHLA opposes actions like volume caps or guarantee fee increases unrelated to risk that are designed to reduce the core affordable housing footprint of Fannie Mae and Freddie Mac,” the letter added.
Other parts of the letter detail how second homes have become increasingly important in the wake of the COVID-19 pandemic, how challenges have come from a rise in all-cash home purchases, a contention that investor loans help to facilitate asset building and proliferate affordable rentals,and how restrictions on these loans could increase exposure of taxpayers.
