TheMReport — News and strategies for the evolving mortgage marketplace.
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24 | TH E M R EP O RT FEATURE compared to $1.6 trillion in 2008. FHFA will continue to maintain restrictions on the GSEs' retained mortgage and investment portfolios and propose reasonable standards for the GSEs post-conservatorship as part of the regulatory frame- work for housing finance reform. 07 Define the Role of GSEs in Multifamily I n addition to a substantial market share in single-family mortgage originations, the GSEs have grown their footprint in mul- tifamily mortgage lending since the financial crisis. Multifamily mort- gage originations have increased as a whole, from around $150 billion in 2007 to a projected $324 billion in 2019, according to Freddie Mac. Before the financial crisis, the GSEs only accounted for about a quarter of multifamily mortgage origina- tions. However, they now represent nearly half of the market's volume. Lawmakers, including Sen. Crapo, have been eager to revisit the scope of the GSEs' involvement in this area as well. Crapo's outline proposes selling Fannie Mae and Freddie Mac's multifamily busi- nesses to be operated as indepen- dent guarantors. The multifamily industry has pushed back against a dramatic wind down in the GSEs' role in the market, arguing they play an essential role in supporting the unique needs of rising apart- ment lending. FHFA's 2018 Scorecard Progress Report, released in April, outlines a $35 billion cap to be placed on the volume of new multifam- ily business that each GSE can take on. Importantly, FHFA has chosen to exclude affordable and underserved market segments from the cap requirements. 08 Evaluate the QM Patch T he original GSE patch for QM requirements will end in January 2021 or when Fannie Mae and Freddie Mac come out of conservatorship—whichever comes first. The CFPB is working in consultation with other regulators to determine whether to allow the patch to expire, temporarily extend its provisions, or revisit the Ability-to-Repay/QM rulemaking altogether. How the CFPB decides to proceed with the patch, which extends safe harbor protections for GSE loans even though they do not meet the regulatory QM require- ments, will likely align with the path of housing finance reform. The CFPB's Spring 2019 Rulemaking Agenda explains that the GSE patch is currently under review. "After further policy analy- sis," the CFPB said it will "deter- mine whether rulemaking or follow up activity is appropriate." Bob Broeksmit, President and CEO of the Mortgage Bankers Association, told American Banker, "Not doing something to extend the patch would be highly disruptive." The GSE patch, however, has been linked to the growth of the GSEs' footprint, in conflict with other objectives from the White House memo. The CFPB recently conducted an assessment of the Ability-to-Repay/QM rule saying, the "continued prominence" of originations covered by the GSE patch "is contrary to the Bureau's expectations at the time of the rulemaking." The CFPB continued, "The scope of GSE-eligible loans is broad and grew broader for a period of time after the rule became effective as the GSEs loosened the credit eligibility." Investors have also gravitated to GSE loans with QM protections in lieu of non-QM originations. As a result, the CFPB said, the PLS market "remains quite small," which "limits the funding available" for non-QM loans. Further extending the GSE patch would allow Fannie Mae and Freddie Mac to continue these trends and risks further disincen- tivizing PLS growth in non-QM originations. Eliminating the GSE patch—assuming the Fannie Mae and Freddie Mac would slow or halt their purchase of non-QM loans without safe harbor protec- tions—would have a significant impact on GSE origination volume. Redwood Trust estimates that between 25-30% of mortgages purchased by the GSEs would be considered non-QM in the absence of the patch. This reduction would certainly contribute to curtailing the GSE footprint. According to Redwood Trust's analysis, the private market could absorb as much as 70% of the GSEs current non-QM volume. This transition would also help the mortgage market achieve a healthi- er blend of non-QM and legitimate QM products, fulfilling the original intention of the CFPB's rule. 09 Direct the GSEs' Role in Affordable Housing F HFA, in coordination with other regulators, including HUD and Treasury, will need to define what measures, if any, will be used to quantify the GSEs' role in promoting affordable hous- ing. The White House has asked regulators to define the role for the GSEs "without duplicating support provided by the FHA and other federal programs." To this end, it is important that HUD is involved in mapping out the placement of multiple federal programs, in addi- tion to the GSEs' post-conservator- ship space in affordable housing. Crapo's outline envisions replac- ing the current affordable housing goals and duty-to-serve require- ments with a Market Access Fund. This fund would extend grants, loans, and rental assistance to advance affordable options for low-income households and com- munities. The affordable housing mission, mandated by Congress in 1992, was one approach to engaging the GSEs in the extension of affordable mort- gage credit. Reinvigorating competi- tion and longer-term predictability to the mortgage market may also help achieve a better balance of credit availability. As discussed with other objectives, limiting certain products, such as larger bal- ance loans and investor and second homes may narrow the GSEs' focus on more low- and moderate-income households. 10 Set Conditions for Ending Conservatorship W hile FHFA has arguably been working on setting the conditions to end conservator- ship for 10 years, finally actualizing the release of Fannie Mae and Freddie Mac will require agree- ment on the appropriate measures of success. Calabria said that achieving "an excess of capital" will be the ultimate threshold for "If there's one thing I know for sure it's that Fannie and Freddie will look much different at the end of my five-year term than they do today." —Mark Calabria, Director, FHFA