5 implications the omnibus spending bill has for mortgages

March 11, 2022 5:27 PM

White House Agenda Depends On Navigating Congressional Thicket — The U.S. Capitol in Washington, D.C.

The $1.5 trillion omnibus spending bill President Biden was expected to sign at deadline Friday promises to bring relief to the single- and multifamily mortgage markets by heading off several threats to operations supporting the flow of funds into U.S. housing.

In addition to funding broad, systemic risk-management measures like a 72-hour cyberattack reporting requirement, the 2,741-page bill avoids a federal shutdown, which could’ve impeded the functioning of a domestic housing-finance market largely dependent on its government ties. Although government and industry stakeholders have made strides in their preparedness for business continuity concerns after having to navigate several large-scale natural disasters, the pandemic and past lapses in federal funding authorization, government shutdowns have remained a significant threat to the housing market.

In addition to removing that threat, the bill’s language addresses other concerns that could otherwise impede access to government-related financing aimed at helping consumers access affordable housing. One aspect of the bill also addresses a key concern for private mechanisms used to fund purchases of residential real estate and other assets.

“These provisions will help consumers, including low-to-moderate-income tenants and borrowers, participate in both the rental and homeownership experience,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association, in an emailed statement.

Specific housing-finance issues the bill aims to alleviate include complications related to Libor's phase-out, outdated Federal Housing Administration technology in need of modernization, continued availability of federal flood insurance and delays affecting the flow of government funds available to finance affordable, multifamily properties.

To learn more about these mortgage-related implications of the spending bill, read on.

Access to government agencies facilitating loans remains unimpeded

Further delays in the spending bill might have resulted in a situation where the mortgage industry’s access to services from entities that directly support lending and servicing would have been restricted.

In the past, entities like the Department of Housing and Urban Development and the Internal Revenue Service have faced challenges when shutdowns have occurred. That’s a concern for mortgage companies, because HUD respectively insures and helps create a secondary market for affordable-housing loans through the Federal Housing Administration and Ginnie Mae, and the IRS provides tax information lenders use in underwriting.

“When we get close to that possibility, we've got to work to make sure we're in contact with all the Ginnie-securitized program operations to see how they're going to handle the hiccup and the lack of funding to operate the programs the way you would on a regular basis,” said Bill Killmer, MBA senior vice president for legislative and political affairs, in an interview. “Dodging that is always a real bonus, so we’re glad to see that Congress gave itself some extra time to get this done.”

FHA can update systems, aid consumers without raising borrower costs

One thing both the Biden and Trump administrations have agreed on is the Federal Housing Administration’s need to improve its older technology, and the bill ensures the agency can build on that, said Killmer.

“There’s continuity on this information technology modernization, which is important on both the single- and multifamily side for FHA,” he said. “That’s good in terms of supporting the flow of information and funding.”

The bill also maintains funding for such projects and homeowner counseling through appropriations, rather than turning to a funding mechanism that could raise the cost of homeownership for borrowers, Killmer noted.

“We're happy that FHA and Ginnie Mae have adequate administrative expenses to handle the mission that they're tasked with and that there's a continued emphasis on housing counseling funding as part of the budget,” he said. “There's a continued need for that emphasis as people are working through the multiple considerations that COVID added to.”

Multifamily borrowers and lenders could get relief from backlogs

Holdups in government funding for affordable apartment projects in some markets have emerged due to difficulties keeping up with demand, and the bill addresses this with a requirement for HUD to report on delays affecting Federal Housing Administration financing.

“We feel good about the cooperative dialogue with HUD, but also really good with the action Congress has taken on the pipeline snags,” said Killmer

Federal flood coverage extended through early Fall

The National Flood Insurance Program is a perennial concern in budget deliberations, and with this bill, it gets extended through the end of the fiscal year (Sept. 30).

“We're very happy that, as has been done many times in these appropriations vehicles, the flood insurance program was not allowed to lapse,” Killmer said.

Securitization investors can avoid Libor-related disruptions

The bill calls for the Federal Reserve to put in place rules that would address the fact that older securitization contracts lack language that allows for a transition from Libor to a successor rate.

The government-related securitized mortgage market has contingencies to address the rate’s discontinuation, but the ones setting terms for legacy transactions don’t, according to Walt Schmidt, senior vice president, mortgage strategies, at FHN Financial.

That could disrupt investors’ operations if left unaddressed, he noted. Without contractual language allowing for a change, some investors worried they’d be stuck using the last published number for Libor, requiring them to use it as a fixed rate at odds with investment directives.

“If you bought something at a floating rate for an asset-liability purpose, and suddenly it’s a fixed rate, it might not fit into your mandate,” Schmidt said.

The concern broadly affects securitizations of various types of assets, according to the Structured Finance Association.

“The bill…sets a clear path forward for the roughly $16 trillion of contracts with no realistic means to be renegotiated or amended – including fixed-income bonds, mortgages, student loans and business loans,” Michael Bright, the association’s CEO, said in a press release.

A little over half of those contracts are likely residential mortgage-related, Bright added in an interview. That estimate, derived from an industry survey, reflects concerns that extend beyond the legacy, private-label mortgage-backed securities market; but the risk is greatest in that niche, the SFA executive confirmed.