On January 5, the Federal Housing Finance Agency announced substantial loan price adjustment changes for certain loan scenarios.
The Federal Housing Finance Agency (FHFA) is making another attempt to implement changes that target the upfront fees of Fannie Mae and Freddie Mac (the businesses) for certain loans. These targeted tariff changes aim to âstrengthen the security and solidity of businesses and guarantee access to credit for first-time buyers and borrowers with low and modest incomesâ. Translated broadly, these changes – similar to the changes implemented in January 2021 and then suspended in September 2021 – aim to improve capital ratios, while allowing Companies to adhere to their mission of “facilitating fair and sustainable access to ownership and quality affordable rental. housing across America.
The FHFA’s Jan. 5 announcement describes substantial changes to the up-front loan-level price adjustment (LLPA) charge for two specific lending scenarios:
High balance loans, except first-time buyers with an income below the median for the region
Fannie Mae and Freddie Mac have each announced details of these changes and aggregators have already started implementing the new LLPAs for blocked loans through Best Efforts. However, mandatory pricing may not be affected until much later, as agencies will charge these new LLPAs on loans purchased on or after April 1.
Unlike the market disruption in March 2021 brought on by the agency’s policy changes, which included seller-specific delivery concentration limits and no stated timeframe, this week’s changes are transparent with an implementation timeframe. longer. LLPAs have been established and the agency’s delivery schedule is clear. As a result, it seems less likely that these changes will produce the same immediate and violent price movement seen in 2021.
What does this mean for borrowers?
With the exception of first-time homebuyers whose income is below the median in their census tracts, rates on second home loans and loans that exceed baseline lending limits will increase in the near term. , regardless of the movement of the bond market.
What does this mean for lenders?
Lenders need to quickly think about their borrower pricing and lending strategies to protect them from deteriorating margins and adverse selection. The result can be an arbitrage opportunity and some price relief down the road.
Lenders who do not cover loans with securities or bonded covenants (i.e., best loan foreclosure efforts at borrower foreclosure time) should see investors change their borrower prices over the next few days. If you are concerned about a potential flooding of second homes and / or high balance locks, it may be a good idea to add these new LLPAs preemptively.
Lenders who must cover and deliver to aggregators should consider implementing these updated LLPAs for new locks now in order to protect the margin on new locks that can be incurred or purchased after investors implement these fees.
If a lender decides to be aggressive and delay implementation, there could be a risk of price deterioration before delivery. Lenders who delay the implementation of new LLPAs should closely monitor the volume of second home and high balance locks added to the position, as well as the pricing of investors on these loans, for any signs of deterioration.
Lenders delivering direct to agencies have probably seen this movie before. and could refrain from making LLPA changes on shorter-term locks, and instead implement LLPAs closer to April.
In these latter two scenarios, lenders will want to issue loans as soon as possible before LLPAs start to increase.
Looking ahead, with the benefit of hindsight, we have reason to hope that the market may partly be able to slowly reverse these changes over time. During the similar situation last year, several aggregators were able to create private label securities (PLS) to capture investment real estate loans, in the same way that PLS had captured high balance loans for years. , and at higher prices than GSEs. It’s possible that we will see something similar for second homes in 2022.
Because the FHFA and Government Sponsored Companies (GSEs) have charted a clear path for these changes, margin protection is easier this time around. However, lenders should closely monitor pipelines and pricing, and communicate closely and frequently with their hedging advisors. By staying focused on the impact of these changes, lenders can help minimize the impact of these new FHFA changes.