Under the “unintended consequences” banner analysts were quick to point out that, given the increase is scheduled for ten years, Fannie Mae and Freddie Mac are not going away any time soon unless the government comes up with the money elsewhere.

Fannie and Freddie won’t absorb this increase, nor will lenders. It’ll be passed on to borrowers.

The increased g-fee, which makes it difficult for Congress to work on efforts to shut down Fannie and Freddie, based on current rates and a $200,000 loan, will cost the agency borrower about $11 per month.

“These institutions, which have been so costly to Americans and are so necessary to the housing recovery, should not be the piggy bank for future arbitrary tax policy,” head of the Mortgage Bankers Association Dave Stevens said.

Due to their government ownership, investors still view their agency (and FHA/VA) MBS’s as safer investments than those offered by private firms.

The law allows FHFA to phase in the fee over two years.

And there’s more mortgage fees born out of this bill. The bill also will raise the annual insurance premium borrowers pay on FHA loans by one-tenth of a percent.

How about, “most people who buy homes or refinance beginning next year”?

Over the weekend the Senate added a guarantee fee increase for Ginnie Mae mortgage-backed securities to the payroll tax bill, after experiencing heavy lobbying from the MI industry which feared that a 10 basis point g-fee hike for Fannie Mae and Freddie Mac MBS would tilt the market toward FHA loans. The final bill now includes g-fee hikes for all three: Fannie, Freddie and Ginnie.

Things change by the day, but the extension of a payroll tax cut and long-term unemployment benefits, estimated to cost $33 billion, will in part be paid for by an increase in the guarantee/guarantor fee charged by the FHA, Fannie, and Freddie.

But things aren’t quite that simple in Congress, as we’ve all learned.

Rep. Scott Garrett, R-N.J., has legislation that is tied into things somehow that would require the FHFA to establish rules for a privately funded mortgage finance system, repeal the risk-retention rule under the Dodd-Frank Act, move mortgage servicing standards to the FHFA, and prohibits any regulator from requiring servicers to commit principal reductions.

Five proposals have been introduced in both the House and Senate that would assemble a future housing finance system and replace the GSEs at the same time. But as I’ve been telling folks for quite some time, don’t look for any substantive changes for another year, or more.

But can we really afford to have government always frozen until the next election? A while back one reader answered:

Continuing sitting on the sidelines is not spurring activity beyond REO’s, short sales and those that have to move. The economy cannot recover without housing, unemployment cannot recover without hiring, and consumers will not spend until the economy improves. It is a vicious circle. Someone has to make a bold step and that involves banks taking a haircut to their asset value. (How many would shed crocodile tears for institutions that have failed their customer base?) Our politicians and civil servants lack the business acumen to successfully steer us out of this and too many bad decisions were made according to political expediency. Constantly aiming recovery efforts at those under water or likely to foreclose will only be a band aid. We need to boldly go where no politician has gone before and do a blanket refinance of all borrowers who are current. Yes, all those people who WOULD spend the $200 or so dollars they would now have over each month. Yes, it will have consequences but what is the alternative … more wasted billions thrown at situation from the bottom up instead of the top down?

The final amount will be determined by the FHFA but shall not be less than an average increase of 12.5 basis points for each origination year or book year above the average fee imposed in 2011 for a guarantee.

It would raise over $30 billion, and I’m sure the costs would be passed on to borrowers in the form of higher rates.

That said, many mortgage traders think the bill faces an uphill battle because it negates other administration efforts to stabilizing the housing market. More on the payroll tax bill and the Fannie/Freddie provision in the Mortgage News Daily link below.
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Reference:
Fannie, Freddie Fee Hikes In New Payroll Tax Proposal

So the Dow rallied nearly 500 points, mortgage prices barely budged, and in fact some lenders/investors had rate improvements. Treasury rates went up very slightly but it is easy to see how financial news like this can jar markets, often more so than weekly or many of the monthly numbers that are released here in the United States. No doubt about it: MBS prices are benefitting from solid demand and limited supply.

In fact, Ginnie Mae’s president Ted Tozer, who I was fortunate to meet at an MBA conference a few weeks ago, noted that Ginnie Mae bonds may be near a peak in price relative to Fannie Mae and Freddie Mac MBS’s but foreign investors and others demanding an explicit government guarantee will continue to bolster demand. Per Mr. Tozer, Investors that buy Ginnie Mae bonds are beginning to find that the favorable capital treatment on the federally backed securities may be fully offset by the higher prices that they must pay.

Fed Funds effective is the weighted average rate on overnight brokered fed funds transactions over the course of a business day. Currently these transactions fall into two types: a smaller volume of trades involving banks that occur at higher interest rates, and a larger volume of trades between Fannie and Freddie (the GSEs) and banks with strong balance sheets that tend to occur at lower rates since the GSEs are presented with few viable options for investing their cash given their daylight overdraft restrictions. It is this second type of trade that dominates averages given the sheer volume of GSE cash. Domestic banks that borrow in Fed Funds pay FDIC-insurance assessments for doing this trade because it grosses up the balance sheet, which is a key reason why the effective is so far below IOER (the Fed’s interest on excess reserves).

But before you ask, if you’ve read this far, “How might lowering the rates paid on excess reserves impact ‘FF effective’?” you should know that the GSEs are significant sellers of funds on a daily basis and yet are not legally eligible to earn interest on balances held with Reserve Banks. Those banks willing and able to borrow funds from GSEs have been able to pay them rates under the IOER that they earn. For example, banks receive 25bps IOER and pay GSEs something like 10bps. A small reduction in IOER might leave this arbitrage intact (and economically attractive to banks), although we would still expect banks to pass through this cost to the GSEs, which would push FF effective rates lower. At some point, though, these rates could get so low that the GSEs would prefer to just leave their funds at the Fed and earn nothing on them rather than be under-compensated for assuming the counterparty risk. Historically, the GSEs have been lenders of funds. The Home Loans have typically used this market as a liquid warehouse for cash to be drawn upon to meet unexpected borrowing demands from member banks. Freddie and Fannie have also been net sellers, using the Fed Fund market for short-term investments for cash earmarked for later principal and interest payments.

Right now, GSE transactions dominate Fed Fund transactions and while lower IOER forces lower the rates that banks are willing to pay GSEs for funds, there is little reason why the GSEs would pay banks for the opportunity to lend them cash – so don’t look for a negative interest rate. Fed funds have never traded at negative rates, even on quarter-end dates when repo and bills have traded negative. And probably the same with LIBOR, which, basically, represents the rate at which banks borrow unsecured funds from one another, there isn’t much reason why any bank would pay to assume counterparty risk and make an uncollateralized loan.

“Ongoing distress in real estate markets and slow growth in jobs and incomes continue to pose risks to credit quality,” Acting Chairman Gruenberg said. “The U.S. economic outlook is also clouded by uncertainties in the global economy and by volatility in financial markets. So even as the banking industry recovers, the FDIC remains vigilant for new economic challenges that could lie ahead.” As was the case in each of the last eight quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings.

For the geographically challenged, Basel, Switzerland is in Europe. The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of several large countries in 1975. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee also frames guidelines and standards in different areas. As the FT says:

Under the global Basel III rules, which will be phased in between now and 2019, banks have to hold top quality capital equal to 7% of their assets, adjusted for risk. The biggest banks will also be hit with an additional surcharge of up to 2.5%. Banks in the European Union will also have to hit a temporary 9% ratio next year after discounting their risky sovereign debt holdings.

But US banks are asking for weakened Basel III rules (FT excerpts and link below).

Basel III’s capital requirements, of course, is one of the reasons servicers (like GMAC) are either shifting servicing values, selling servicing, or deciding they don’t want it anymore period.

US lenders are urging financial regulators to ease new international bank liquidity rules as the industry faces a collective shortfall of $1.4 trillion for complying with the new regulations.

…American banks are at a disadvantage to their foreign peers because the regulatory response to the financial crisis limits the kind of assets US companies can use to show they could withstand a 30-day bank run … The package of reforms, known as Basel III, includes a provision that requires banks to hold enough cash-like assets to survive a month-long crisis. Lenders in the US and in Europe have argued that the “liquidity coverage ratio” is too stringent and would limit lending.

…The Clearing House urged US regulators to relax implementation of the Basel standards because they unfavorably treat debt and mortgage securities issued by Fannie & Freddie.

…While cash and sovereign debt can be used to meet the entire liquidity requirement, Fannie and Freddie securities, covered bonds and high-quality non-financial corporate bonds can only count towards 40 per cent of it.

…Fannie and Freddie securities are generally regarded as more liquid instruments than covered bonds. We have a little time: the liquidity rule will not go into effect until 2015. In response to complaints from lenders, financial regulators agreed to fine-tune the liquidity standards, where needed, by 2013.

Bill R. wrote to me, “When Basel III took over it rigged/leaned the banking systems rules and regulations toward the larger banks awash in global CDS and CDO’s. Left swinging in the wind were smaller banks forced to stand on their own feet, their own balance/income statements without the support of Government bailouts. This is what the unknowing useful idiots on WS are jumping up and down about.”

Across the Pacific, Australia’s major banks are preparing to issue covered bonds to enhance liquidity-risk positions as Basel III rules loom. “The two major benefits for Australian banks issuing covered bonds are access to lower costs of funding and a move to a more stable longer-term source of funding,” said William Mak, credit-desk analyst at Nomura. “Covered bonds will also have implications for the net stable funding ratio as banks shift to longer-term stable funding required under Basel III liquidity reforms.”
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Reference:
-FT: Fed Sets US Banks Toughest Stress Tests
-FT: US Banks Ask For Weakened Basel III Rules
-TheBasisPoint: Time To Dump Basel Bank Capital Rules?

The bank is disputing Fannie Mae’s demand that lenders repurchase mortgages or cover any losses themselves if an insurer drops coverage, Bank of America said this month in a regulatory filing. BofA said it ‘does not intend to repurchase loans’ under what it deems to be new rules, and the refusal may trigger penalties or other sanctions, according to Fannie Mae. At stake is Bank of America’s ability to contain costs from faulty mortgages, which have reached about $40 billion for refunds, lawsuits and foreclosures…Fannie Mae didn’t enforce this policy before because “it was a different economic time,” said David Felt, a former deputy general counsel at the FHFA. Defaults were fewer and the firm didn’t want to harm relations with lenders by being too picky, he said. “They’d overlook the small things. Well, they’re no longer small things, and they’re no longer the old Fannie Mae.”

And in other Bank of America news, The Financial Times reports that the states of New York and Delaware…

…won the right to intervene in a proposed $8.5bn settlement agreement over soured mortgage bonds between Bank of America and a group of aggrieved investors. New York attorney-general Eric Schneiderman and Delaware’s Beau Biden say the deal is inadequate to investors and that the trustee for the investors, Bank of New York Mellon, broke state laws. Mr. Schneiderman asked the judge overseeing the agreement to reject it. Bank of America struck the June accord with 22 institutional investors, including the Federal Reserve Bank of New York and bond group Pimco, to settle claims that the bank repurchase home loans bundled into 530 securities with an original loan balance of $424bn. BNY Mellon agreed to the deal on behalf of all investors in the securities.” “This could complicate efforts by BofA to limit its exposure to allegedly faulty mortgage practices. The company’s shares have plunged 59 per cent this year in part on concern the bank faces unresolved and unknown mortgage liabilities. Its shares closed at $5.49 on Monday, the lowest since March 2009.

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Sources:
-BusinewwWeek: BofA Won’t Cooperate Fannie’s Loan Buyback Policy
-FT: States Win Right To Block $8.5b BofA Settlement

CONFORMING LOAN LIMITS
Tier 1-TRUE CONFORMING: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE CONFORMING: Rates .125% to .375% higher than Tier 1 for loans to these limits:
-$625,500 (1 unit)
-$800,775 (2 units)
-$967,950 (3 units)
-$1,202,925 (4 units)
-High-Balance limits vary by county: find yours here

Tier 3-JUMBO: Rates .25% to .625% higher than Tier 2 for loans to $2m.

FHA LOAN LIMITS
Tier 1-TRUE FHA: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE FHA: Rates .125% higher than Tier 1 for loans to these limits:
-$729,750 (1 unit)
-$934,200 (2 units)
-$1,129,250 (3 units)
-$1,403,400 (4 units)
-High-Balance limits vary by county: find yours here

As for Friday’s broad spending bill, here’s the excerpt that increased FHA loan limits:

Sec. 238. Notwithstanding any other provision of law, for mortgages for which a Federal Housing Administration case number has been assigned during the period beginning on the date of enactment of this Act and ending on December 31, 2013, the dollar amount limitation on the principal obligation for purposes of section 203 of the National Housing Act (12 U.S.C. 1709) shall be considered to be, except for purposes of section 255(g) of such Act (12 U.S.C. 1715z-20(g)), the greater of–

(1) the dollar amount limitation on the principal obligation of a mortgage determined under section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)); or

(2) the dollar amount limitation that was prescribed for such size residence for such area for 2008 pursuant to section 202 of the Economic Stimulus Act of 2008 (Public Law 110-185; 122 Stat. 620).

No wonder this is confusing to consumers. The full bill is 159 pages, and the tiny excerpt above on FHA loan limits is as clear as mud because, instead of explicitly stating loan limits, it references two other bills that made the higher loan limits law previously.

This post (and future posts) with explicit loan limits for 1-4 unit properties should clear things up.

The debate will continue as politicians and lobbyists try to raise Conforming to match the new higher FHA limits.

Stay tuned, but go by these limits until then.

See WeeklyBasis for rates in all tiers and commentary in plain English, and follow daily on Twitter and Facebook.

The recent HARP 2.0 announcement was largely in line with expectations, though perhaps the biggest surprise was Freddie’s maintaining of reps and warrants on the original loan file for <80% LTV loans. But many are still dubious about broader economic growth impacts.

Common to both Fannie and Freddie are several elements.

It eliminates the 125% LTV cap for HARP – this increases the universe by 3%, and 10-15% for high coupon 2006-08 vintages. It extends HARP through December 31, 2013 – this should make servicers more willing to invest in HARP because it is no longer simply a one-year program.

Both programs will become effective on December 1 (although LP won’t be ready until early next year, and many companies are running into problems not being able to manually underwrite conventional conforming loans – see notes below).

It allows up to one delinquency in the prior 12 months, as long as it was not within the last six months – this increases the number of borrowers eligible for Freddie HARP by 3-5%, no change for Fannie.

HARP 2.0 caps LLPAs on >80 LTV 30-year fixed rates at 75bp (previously, high LTV mortgages were capped at 2 points) – this reduces costs for high LTV borrowers, though they were already deep-in-the-money.

For low LTV 30-year mortgages, the cap will continue to be at 2 points – this is unchanged. And it eased rep and warrant language, although this is still Fannie and Freddie specific.

There is apparently Fannie Mae specific language.

For example, for DU Refi Plus (Fannie’s desktop underwriting system, used mainly for cross-servicer refis) the lender is not held responsible for any of the reps on the original loan.

HARP 2.0 clarified exactly which reps remain on the old loan file under Refi Plus (the more streamlined approach, used mainly for same-servicer refis), the lender must rep to basic standard reps on the original loan such as:

(1) it doesn’t violate Fannie’s charter (e.g. it’s not a condo hotel which would be a commercial property);

(2) it doesn’t violate the law; and

(3) there is no collusion among borrowers to commit fraud. Solicitation may be done on >80% LTV loans as long as it is done across both Fannie and Freddie, and cannot target only loans that the lender doesn’t own.

Pooling for the highest LTV loans (>125%) will be in a new CV prefix beginning June 2012. These will be non-TBA eligible. And it is expected that the AVM coverage for Fannie Mae will go from about 30% currently to as high as 80% to match Freddie, though this is not specifically outlined in Fannie’s announcement.

There is also still Freddie Mac specific policy.

For loans >80% LTV, Freddie will no longer hold the lender responsible for the original loan file. For loans <80% LTV, the lender will actually still hold the original reps and warrants. (This won't help refinancing low LTV Freddie pools.) Lastly, if the borrower is under 80% LTV on the first lien, there is a cap on the total first plus second lien of 105% LTV.

As always, it is best to consult the actual announcements from Fannie & Freddie, as it is with other investors!

What impact is this expected to have on existing MBS pools?

Servicers may have an incentive for Fannie MBS and for high LTV (>80%) Freddie loans to refi into the easier reps relative to the old loan.

Second, a greater AVM coverage by Fannie will allow servicers to target more than twice as many borrowers as before.

Third, HARP 2.0, in combination with more AVMs, will give servicers the confidence to refi high LTV borrowers, since there is no fear of accidentally exceeding a 125% LTV cap.

And to encourage high LTV refinancing, the GSE’s are lifting existing restrictions on borrower solicitation for >80% LTV loans which should increase volumes.

As for other miscellaneous observations I’ve read…

For loans being processed through Refi plus (manual underwriting), the lender will represent and warrant that the original loan being refinanced by a Refi Plus mortgage loan was not originated or sold pursuant to any scheme or pattern of fraud that involved two or more mortgages and two or more perpetrators acting in common effort with respect to such mortgages.

Also, the lender must represent that the loan being refinanced was eligible for sale in accordance with Fannie Mae’s charter.

Apart from loan size restrictions that may vary based on the units in a home, this restriction can potentially apply to loans that were falsely reported to have an LTV less than 80%. Per the charter, these loans would have required mortgage insurance.

The Fannie Mae release made no mention of automated appraisals. However, it did state that the lender is responsible for reps and warrants on the new loan if an appraisal is obtained. Aside from the reps and warrants relief due to the likely increase in the usage of automated appraisals, the release did not provide any reps and warrants relief on appraisals.

According to one analyst, about 80% of Freddie HARP refinancings are already using automated appraisal whereas the number is only 30% of Fannie HARP refinancings. The general market perception was that as HARP 2.0 is rolled out, Fannie Mae will allow lenders to use automated appraisals on a much larger percentage of HARP loans. Since the automated appraisal is provided by the GSEs, this would reduce the appraisal related reps and warrants risk on the new loan.

But Fannie Mae will only allow automated appraisal for DU Refi Plus. For Refi plus (manual) – which is much more common for same servicer refinancings since the loan does not need to be re-underwritten – the lender can either use the original appraisal (if they can represent and warrant that the property value is not less than the original appraised value) or use a new appraisal or exterior-only inspection.

In other words, automated appraisals cannot be used for Refi plus (manual). This would mean that originators would need to use DU Refi plus but in this case they would need to re-underwrite the loan by gathering the income/liabilities/asset information.