Federal Housing Finance Agency Director Mark Calabria said the controversial amendments made to Fannie Mae and Freddie Mac‘s Preferred Stock Purchase Agreements in late January should be just the start.
“I said in January when the PSPA were signed — there needs to be another set of amendments. January really is a bridge,” he told Wells Fargo‘s Kristy Fercho, chair-elect of the Mortgage Bankers Association, at the trade group’s spring conference. “We knew when the January memo was being signed that Fannie would hit the retained earning caps and the sweep would go into place. And so it was absolutely critical that we ended this sweep so we can continue to build capital. Because again, just as it is at Wells or any other financial institution, with Fannie and Freddie, capital really is the binding constraint on the risk and footprint and activities they can take.”
He added: “So if we weren’t able to retain that capital there would unfortunately be a further shrinkage. So we’re building capital, that’s the important part, we absolutely need another round of PSPA to deal with the capital stack because I’m in a situation where we continue to retain earnings, but given the structure of the balance sheets as they are today, It will be very difficult if not impossible to raise outside capital.”
Calabria’s statement calling for another set of amendments comes after numerous stakeholders in the mortgage finance industry expressed concern with the initial series of amendments, which were put into place by the FHFA and Treasury Department. The MBA wrote in a letter in March that several of the revised PSPA amendments could cause “unnecessary disruptions in the housing finance system.”
The thorniest issue at play is a change to investment properties, a PSPA amendment that limits the GSEs in buying single-family loans secured by investment properties or second homes. The amendment caps investment property or second home acquisitions at 7% of the GSEs’ total single-family acquisitions. The MBA fears that limit could be an issue for lenders given the higher activity in those loans since the start of 2021.
“It is not clear that private market participants currently have the capacity or resources to absorb the entirety of the gap between the Enterprise limits and the volume needed to satisfy underlying demand,” the MBA letter states.
Understanding Today’s Connected Borrower
Join Ashwin Dayal from LoanMonkey, BeSmartee CEO Tim Nguyen and Insellerate CEO Josh Friend to learn how to transform the borrower journey from transaction to relationship and gain a significant lift in production in today’s digital lending environment.
Presented by: Insellerate
Calabria said on Tuesday that the regulator was taking a close look at the PSPA agreements.
“So for us to really be able to bring in the kind of capital that we needed to Fannie and Freddie for them to be able to support the mortgage market, we need to restructure the balance sheet, and that needs to be another round of PSPA and of course all the things in the PSPA are on the table,” he said. “I think it’s also worth remembering that the PSPAs themselves are not meant to be permanent, these are temporary bridges to getting Fannie and Freddie fully capitalized.”
Fercho, the head of home lending at Wells Fargo, asked Calabria about the 7% hard cap and what stakeholders can do now before any new amendments are put into place.
“I obviously wish that we were in a better capital position and had a stronger Fannie and Freddie that could support more of the market, and that’s our objective” Calabria replied. “The reality is there will be some short-run pinch, if you will, on the market, while we try to build a stronger Fannie and Freddie that can support the market. I do want to clarify because I think there’s often some misperceptions out there, and to say, the PSPA are lines of credit, Fannie and Freddie cannot legally knowingly take risk against PSPAs. That would be like if Wells said, ‘Well, we’ve got deposit insurance so who cares.'”
In the 30-minute question-and-answer session with Fercho, Calabria also touched on appraisal and lending standard flexibilities extended to the GSEs as part of the COVID-19 response. Calabria said his expectation are that by mid-summer, the FHFA would end the flexibilities on collateral valuations unless circumstances force another extension. The agency will learn from the RFI process and implement some of the changes permanently, he said.
Some other flexibilities, such as power of attorney, verification requirements and condo project reviews, will be wrapping up “this summer without extension.”
Calabria also expressed little concern about forbearances for Fannie and Freddie borrowers. Those forbearances peaked at 2.1 million in the middle of May 2020, and he expects them to trickle down to about 300,000 around September 2021. “A small number will go to foreclosure,” he said.
