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Volume 17 - Number 14

July 14, 2017

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Fannie/Freddie 1-Family MBS Business Slumped in 2Q17

Fannie Mae and Freddie Mac issued $189.70 billion of single-family mortgage-backed securities during the second quarter of 2017, a 13.1 percent drop from the first three months of the year. A new ranking and analysis by Inside The GSEs reveals that much of the decline resulted from a slowdown among large banks and thrifts. The four banks with over $1 trillion in assets delivered just $43.23 billion of home loans into Fannie/Freddie MBS during the second quarter. That was down 29.1 percent from the previous period, knocking the group’s combined market share down from 27.9 percent in the first quarter to 22.8 percent.

FHFA Ends Litigation Against RBS With a $5.5 Billion Settlement

In the second largest settlement so far involving Federal Housing Finance Agency-initiated lawsuits from 2011, the FHFA and the Royal Bank of Scotland this week reached a settlement for $5.5 billion. This represents near closure for charges filed against 18 issuers and underwriters alleging securities law violations and fraud regarding non-agency mortgage-backed securities sold to the GSEs. Under the terms of the settlement in FHFA v. The Royal Bank of Scotland Group plc et al., Freddie Mac will get approximately $4.525 billion and Fannie Mae will get about $975 million. The court cases date back to 2011 and involve senior classes of subprime and Alt A MBS Fannie and Freddie purchased from RBS between 2005 and 2007.

Fed Governor Wants GSE Reform Progress Now Before it’s Too Late

With GSE reform moving up the priority list in the minds of lawmakers and industry executives, Federal Reserve Governor Jay Powell joined the conversation last week and said it’s time to act now before it’s too late. Following the Senate Banking, Housing and Urban Affairs Committee hearing on GSE reform, Powell spoke at the American Enterprise Institute and urged lawmakers to come up with a solution while the economy is healthy. He worries that if reform doesn’t happen soon, the status quo will become comfortable. Moreover, Powell said any change would be more challenging to enact during difficult economic times.

Industry Seeks More Tangible Activities in GSE DTS Proposals

Industry groups lauded the GSEs’ efforts to increase funding for underserved markets but recommend they add more specific activities focused on increasing loan purchases and speeding up the process. In May, Fannie Mae and Freddie Mac released draft proposals on ways to grow financing for specific underserved markets under the Federal Housing Finance Agency’s duty-to-serve requirements. Those markets include manufactured housing, rural housing and preserving affordable housing for low- and moderate-income households. The National Low Income Housing Coalition said while the plans demonstrate the GSEs’ commitment to increase their impact in underserved markets, they focus largely on scoring and technical compliance.

UI: Single-Security Efforts Alleviated GSE Pricing Differences

Pricing disparity between the GSEs has almost disappeared since single-security efforts began, according to a new paper by the Urban Institute. The authors called the progress on the initiative an “unheralded success” in a paper released this week. In 2012 and 2013, Freddie’s 3, 3.5, and 4 percent coupons traded at more than a $0.30 discount to Fannie Mae’s. That number narrowed to about $0.15 in 2014 and 2015 and by early 2017 it had largely converged, said the UI. “Interestingly, the pricing disparity has all but disappeared since the single-security effort began,” said Laurie Goodman, Jim Parrott and Bing Bai, authors of the study.

FHFA Proposes New Federal Home Loan Bank Capital Requirements

The Federal Housing Finance Agency, although late to the game, is proposing new capital requirements for the Federal Home Loan Banks to comply with the Dodd-Frank Act. Other regulators have already implemented the Dodd-Frank Act provisions that shift capital requirements away from ratings. This proposed rule would carry over most of the existing regulation without any major change, but it would revise the credit risk component of the risk-based capital requirement, along with limitations on extensions of unsecured credit. Currently banks calculate credit risk capital charges and unsecured credit limits based on ratings issued by a nationally recognized statistical rating organization. But the proposed rule would require the banks to use their own internal rating methodology.

Fitch Ratings Says New GSE Tools To Improve Mortgage Underwriting

A host of new GSE tools recently implemented or in the pipeline, including automated appraisals, will improve mortgage underwriting, according to Fitch Ratings. The rating service noted that alternative methods of managing and verifying data are helping Fannie Mae and Freddie Mac change the process for underwriting mortgage loans in the U.S. New approaches to things like appraisal valuation and income verification are giving the GSEs a more efficient way to assess credit risk, while reducing costs for sellers and borrowers, said Fitch. “The appraisal valuation process is evolving primarily due to the introduction of the Uniform Collateral Data Portal through which lenders electronically submit appraisal reports for conventional mortgages delivered to Fannie or Freddie,” said Fitch.

Freddie Mac Changes Requirement to Accept Lender Gifts and Grants

Freddie Mac recently changed the circumstances in which borrowers can use gifts and grants from a lender toward a downpayment in its Home Possible mortgage products. Currently, a lender can provide a gift or grant for a portion of or the entire downpayment, according to a spokesperson for Freddie, but that’s about to change. Last week, sellers were notified that gifts or grants from the lender would only be allowed after the borrower contributes at least 3 percent of the appraised value or purchase price. This contribution must be made from the borrower’s personal funds and/or other permitted sources of funds.

Structuring CRTs as REMICs Could Boost Liquidity, Says Morningstar

Making credit-risk transfers more attractive to real estate investment trusts by rebranding some of them as real estate mortgage investment conduits may be just what the market needs, according to a new report by Morningstar. The rating service said the change likely won’t have a negative impact on the credit risk and quality of those deals and could help the GSEs broaden their investor base. The proposed changes to Fannie Mae’s Connecticut Avenue Securities and Freddie Mac’s Structured Agency Credit Risk programs would allow REITs and some overseas investors to participate more broadly in the programs.

Newly Filed Shareholder Cases Challenge FHFA’s Structure

GSE shareholders are continuing to argue that the structure of the Federal Housing Finance Agency is unconstitutional. The topic has come up ever since a 2016 ruling found that the similarly structured Consumer Financial Protection Bureau is not constitutional. Two new cases filed within the past month in Michigan and Minnesota are asking the courts to vacate the Treasury sweep of GSE profits altogether. In late June, three GSE shareholders filed a fresh lawsuit in the U.S. District Court for the District of Minnesota. The three plaintiffs, Atif Bhatti, Tyler Whitney and Michael Carmody, also want the court to strike the...

GSE Roundup

NV Supreme Court Favors GSEs in HOA Litigation. In Nationstar Mortgage, LLC v. SFR Investments Pool, the court found that mortgage servicers have standing to assert, on behalf of the GSE investor, that the Housing and Economic Recovery Act preempts state law and prevents extinguishment of the GSE loan at a Homeowners Association foreclosure sale. Freddie Prices $1.1 Billion Multifamily K-Deal. This week, Freddie Mac announced that it recently priced a new offering of Structured Pass-Through Certificates (K Certificates). The company expects to issue approximately $1.1 billion in K Certificates, which are expected to settle on or about July 24, 2017. Fannie Updates DU with New HomeReady Income Limits. As of July...

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