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Volume 16 - Number 10

May 13, 2016

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GSE New Business Up Slightly in April, Signs of Easing Credit

Fannie Mae and Freddie Mac issued a combined $68.91 billion of single-family mortgage-backed securities in April, a 3.8 percent increase over their production in March, according to a new Inside The GSEs ranking and analysis. So far, however, the 2016 market is still lagging by 10.6 percent the production volume during the first four months of last year. While year-to-date purchase-mortgage business was up 12.2 percent for the two GSEs, the refinance market through April was down 24.3 percent from the same period in 2015. Fannie issuance was up 9.9 percent from March, including a 15.4 percent spike in refi activity.

GSE Q1 Shows Loss and Net Income Drop, Renews Capital Concerns

Freddie Mac posted a net loss and Fannie’s profits sagged in the first quarter of the year, prompting some industry groups to renew their calls for the GSEs to rebuild capital. A surprise interest rate decline in the first quarter of 2016 resulted in sharply lower net income at Fannie and Freddie. The GSEs booked a combined $7.37 billion in net derivative losses for the first quarter that compromised most of their income from their core businesses. Since 2012, when the two GSEs became profitable again, they have booked $23.46 billion in hedging losses. Both GSE CEOs pointed to volatility in the market as having affected earnings this quarter.

Freddie Mac CEO Talks Credit-Risk Transfer Considerations

Freddie Mac CEO Donald Layton said in a phone interview with Inside The GSEs last week that the phrase “front-end risk sharing” is not well understood. He said almost all of the credit-risk transfer transactions can be referred to as front end because the terms are front end. “The risk-transfer mechanism is back end, the risk-transfer arrangement is front end,” he said. “If the loan comes to us and is put in one of our mortgage-backed securities, it is in fact a back-end risk transfer,” he said, explaining that if the loan goes bad the owner of the MBS takes the loss and looks to...

FHFA Raises Caps for Multifamily Lending Amid Strong Fundamentals

The Federal Housing Finance Agency recently raised the caps of multifamily purchases by Fannie Mae and Freddie Mac, by $4 billion. The cap was increased from $31 billion to $35 billion. With the GSEs already having a huge market share in multifamily finance, 78.3 percent according to recent figures by affiliated publication Inside MBS & ABS, the FHFA said an increase in the caps is warranted due to the larger-than-expected market this year. Recent projections by the mortgage giants show that they are issuing multifamily mortgage-backed securities in 2016 at a rate that may exceed $100 billion by the end of the year.

Some Say FHFA Principal Reduction Program Comes too Late

Less than 1 percent of borrowers will be able to take advantage of the Federal Housing Finance Agency’s new principal reduction program, according to recent estimates from RealtyTrac data, which reinforces the concerns of some who believe the progress is too little, too late. The California-based firm that specializes in data on foreclosed and underwater properties said that out of the 6.7 million seriously delinquent underwater properties in the US at the end of the first quarter of 2016, about 0.50 percent, or 33,622, would potentially qualify for the principal reduction program. When the program was announced in April, the FHFA ackowledged that only a select group of troubled borrowers will be eligible.

Upcoming Changes to GSE Tools Include Alternative Credit Data

The GSEs are preparing big updates to their loan origination tools and one of the most noticeable changes will be Fannie Mae’s use of trended credit data to help more consumers qualify for a mortgage. Fannie will be rolling out Desktop Underwriter 10.0 during the weekend of June 25. Trended credit data relies on expanded information on borrowers’ credit history that shows the balance, minimum payment due and amount that is generally paid to determine if the consumer regularly pays off debt or carries a revolving balance. By using trended credit data in the risk assessment, Fannie said it allows for a more thorough analysis of the borrower’s credit history and is a “powerful predictor” of risk.

Flood Insurance Act Could be Problematic for Fannie, Freddie

While many applaud the Flood Insurance Market Parity and Modernization Act that passed the House unanimously late last month, one mortgage group says the bill could cause problems for Fannie Mae and Freddie Mac. Currently, homeowners can only get coverage from the National Flood Insurance Program. The bill, H.R. 2901, expands flood insurance options by including private flood insurance, and requires the GSEs to accept any private flood insurance company a borrower chooses, as long as the company is financially sound. It also lifts certain federal restrictions placed on insurance companies and gives states more flexibility to license and regulate private flood insurance. Rep. Dennis Ross, R-FL, who co-sponsored H.R. 2901 with Rep. Patrick Murphy, D-FL, said the...

Panel Focuses on Bringing Private Capital Back to the Market

Congress should encourage a large increase in the amount and types of risk-transfer transactions the GSEs take on, Rep. Ed Royce, R-CA, said while speaking on a panel focused on restarting the private market for mortgage credit. Royce said that would include both back-end and front-end risk sharing. “We also have to figure out how to promote risk-transfer transactions that allow access to all types and sizes of mortgage originators,” he said. Real estate investment trusts, for example, which account for just 2 percent of risk-sharing transactions, face regulatory challenges that limit their involvement. Stanford Kurland, CEO of PennyMac Financial Services, said it addressed some of the REIT issues in structuring its PennyMac Mortgage Investment Trust.

Authors Suggest Simplifying Housing Reform Via Ginnie 2.0

In one of the latest proposals for GSE reform, a trio of authors suggested that most other proposals have been too “complicated” and suggest that Fannie Mae and Freddie Mac morph into a Ginnie 2.0 structure. They said this would utilize the best of the GSEs’ core capabilities and Ginnie Mae’s functionality. Ginnie is best suited to support the conventional market of Fannie and Freddie while dropping the more harmful aspects, such as their large mortgage portfolios and interest rate and credit risk, said the authors, who include Jim Park, CEO of the Mortgage Collaborative. They suggested that the Federal Housing Finance Agency transfer the necessary GSE components, such as key employees, underwriting...

FHLBank Income Down in First Quarter, Decline in Advances

The Federal Home Loan Bank system earned $825 million in the first quarter of 2016, down from the $1.015 billion earned in the first quarter of 2015, according to figures compiled by the system’s Office of Finance. Lower gains on litigation settlements and higher losses on derivatives and hedging activities for the three months ending on March 31 contributed to the 19 percent decrease, according to the OF. Litigation settlements accounted for $348 million in income in the first quarter compared to $480 million a year earlier. The 1Q16 income was from the FHLBank of San Francisco’s $211 million settlement and the FHLBank of Des Moines’ $137 million settlement of claims arising from investment in non-agency mortgage-backed securities.

Fannie Survey Shows Smaller Lenders Most Impacted by TRID

Although the GSEs are reviewing loans to make sure the new TRID forms are being used, not for technical compliance, Fannie Mae’s survey of lenders on the impact of TRID showed vendor coordination and communication with key players have been the biggest challenges. More than three quarters of the lenders surveyed cited challenges when it comes to managing and coordinating third-party technology vendors and communication with buyers, sellers and loan officers. In addition, smaller lenders said they feel more burdened since the rule took effect in October. Fannie said many small- to-midsized lenders indicated that they don’t have the same resources as larger institutions which can easily invest in upgrading systems and have in-house compliance resources to...

GSE Roundup

Freddie Announces Second NPL Transaction of 2016. Freddie Mac announced a $135 million non-performing loan transaction this week. The NPLs are currently serviced by JP Morgan Chase Bank. Bids are due from qualified bidders on May 25, 2016. The sale is expected to settle in the third quarter of 2016 and the NPLs are offered as one pool. The winning bidder will be determined based on economics, subject to meeting Freddie’s internal reserve levels. Fannie Names Winners of Latest NPL Sale. Fannie Mae’s winning bidder of all four pools in its fifth non-performing loan sale is Goldman Sachs. The sale included approximately 7,900 loans totaling $1.48 billion in unpaid principal balance. The transaction is expected to close June 27, 2016.

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