Top housing-finance policy developments in 2023

December 26, 2023 4:00 AM

Fed Resets Goals For Job Market In Light Of Covid Reality — The Marriner S. Eccles Federal Reserve building in Washington, D.C.

Common themes in government-related actions with implications for home mortgages in 2023 were moves that affected the economics of the business, surprising legal developments that could overturn traditional dynamics and upheaval in the banking system.

Federal Reserve actions related to monetary policy were clearly the big driver, with the latest change at the time of this writing being a statement forecasting an eventual cut in short-term interest rates, something that hadn't been seen in a while.

Other government-related agencies that control large sectors of the mortgage market took some steps that hit the bottom line of businesses in the financial services industry and consumers' wallets as well.

Here are some of the biggest developments in housing finance over the course of last year, with comments from some market experts about why they were, or will be, important.

The Fed signals a potential reduction in rates

The long runup in broader interest rates spurred by Federal Reserve actions clearly continued to drive a lot of the lending challenges and servicing profits in the mortgage market in 2023, so signals first indicating a plateau and then even a possible reduction were big news.

"The Fed is the elephant in the room. So many things get overshadowed by everything they've done since 2020," said Jason Obradovich, chief investment officer, New American Funding.

While the Fed's comments at deadline suggested it wouldn't be taking mortgage-backed securities portfolio actions that could alleviate pressure on housing the way trade groups hoped, the promise of a short-term cut alone looked likely to reverse some but not all of their concerns.

How much follow-through there is will determine how important this particular announcement turns out to be in the future, but with an election year ahead, some prognosticators think there'll be pressure on policymakers to stick with the theme.

"Across the housing industry, market experts expect a gradual mortgage rate decline from current levels," said Sean Grzebin, head of consumer originations, Chase Home Lending.

Since many outstanding mortgages were made when there were record-low rates and the Fed would be coming down gradually from a relatively high point, that could help lenders a little while adding very limited prepayment risk to servicers.

FHFA makes a sweeping change to loan prices with one tweak

Fannie Mae and Freddie Mac's pricing hadn't really been thoroughly updated since it switched to a risk-based system in the wake of the Great Recession, and the Federal Housing Finance Agency needed to account for certain capital directives, so it created a new grid.

Adding new differentiators to pricing proved controversial with the industry because one of them was the debt-to-income ratio, which changes throughout the origination process. Because of this, it would've created complications related to disclosures. So FHFA scrapped it.

Even after that, some Republican legislators said there was an objectionable degree of borrowers with stronger financials cross-subsidizing other borrowers with affordability issues in the new pricing regime, which were credit scores and loan-to-value ratios.

FHFA Director Sandra Thompson said she was puzzled by that reaction and called it a misunderstanding of the capital framework, the long time risk-based mechanism involved, and the role of mortgage insurance. She solicited a new round of feedback in response.

Republican critics passed multiple bills to roll the pricing changes back, one of which cleared the House, but they hadn't gotten the necessary bipartisan support to pass at deadline.

The issue was important because Fannie and Freddie buy a significant number of the mortgages in the U.S. market, so how they price them has a lot to do with lender and borrower costs.

How FHFA responds to the latest round of feedback on the capital framework in particular will remain important in 2024 because they will be the real driver of any subsequent pricing changes made next year, said Brian Chappelle, partner at Potomac Partners.

"The capital standards for Fannie and Freddie are, to me, the big issue, because everything emanates from that," he said.

Congressionally-mandated credit scoring changes that were under discussion 2023 could play a role as well.

FHA finally cuts the mortgage insurance premium

One of the industry's biggest long-time asks finally got answered when the Federal Housing Administration reduced the annual MIP by 30 basis points this year, cutting a key cost for first-time homebuyers.

That helped lenders this year, but with profitability still elusive for many in the Mortgage Bankers Association's last study, affordability remaining under strain and the FHA's insurance fund still healthy, trade groups are looking for more breaks on these types of costs.

"It was definitely beneficial to cut the amount of the mortgage insurance premium," Valerie Sanders, president of the National Association of Mortgage Brokers. "The next step is for FHA to do something more closely aligned with the Fannie and Freddie policy, that once a borrower hits an 80% loan to value or below, for the mortgage insurance to fall off."

New impasses on the federal budget

Twice this year the division in Congress threatened spending authorization supporting programs central to mortgage industry actions necessary to originate and servicer loans, raising particular concern for support of flood insurance.

"In response to the 2019 shutdown, several states with large numbers of federal employees enacted permanent legislation that would automatically take effect if and when the United States government shuts down again," Covius, a mortgage services provider, said in its year-end review and outlook report. "These state laws generally provide temporary eviction and foreclosure protections for federal employees or contractors during a shutdown, and other states might consider similar laws if the government shuts down in 2024."

CFPB challenge gets heard before the Supreme Court

The Consumer Financial Protection Bureau is responsible for a host of rules mortgage lenders and servicers have to follow, so the fact that the Supreme Court began hearing oral arguments on a case challenging its funding mechanism last year has significance.

"If the court does find that the bureau's funding structure is unconstitutional, it would call into question the validity of the entire body of CFPB rulemaking and enforcement actions since its creation in 2010," Peter Idziak, senior associate at law firm Polunsky Beitel Green.

While this could be welcome to the business side of the industry in some respects, Idziak warns that "a decision invalidating all of the CFPB's rulemaking over the past twelve years would throw the mortgage market into chaos."

The Supreme Court's decision, due in 2024, will be significant both in terms of the case challenging the bureau's funding, CFPB v. Community Financial Services Association of America; and also Chamber of Commerce v. CFPB, which could limit the bureau's powers.

"The CFPB had added discrimination as an item to look for in the unfair, deceptive, or abusive acts or practices section of the manual, but the court determined that it lacked the legal authority to do so," Covius said in its year-end review and outlook report.

Chamber of Commerce vs. CFPB, and some other cases involving the bureau, have been put on hold pending the Supreme Court's decision.

A new capital proposal for banks following the 2023 crisis

Depositories have generally protested revamped risk weightings floated this year and there's some concern from the mortgage banking industry too, which foresees them potentially leading to reduced involvement in servicing, warehouse financing and low down-payment loans.

However, the proposal may have a silver lining for some nonbanks due to reduced competition if they pass. So the net impact may be some reconfiguration in the business, particularly in the government market where it could interact with other rules for capital and reverse mortgages.

A wave of bank failures early in the year contributed to the strictness in the depository rules, although critics have questioned whether higher risk weightings for credit characteristics like high loan-to-value ratios are appropriately matched with the concerns that arose.

The banking crisis generally stemmed from the holding of uninsured deposits that customers withdrew, but some institutions affected did hold older, lower-rated, longer-term mortgage-related investments that added to issues given higher current market financing costs.

VA asks servicers to put foreclosures on hold

Foreclosure suspensions from the pandemic have largely been wound down, but in a surprise move the Department of Veterans Affairs asked mortgage companies to reinstate one until it could get a successor to the partial claim program in place due to difficulties with its expiration.

The announcement was significant to servicers because at the time of this writing it had raised questions about how they would handle their responsibility to advance funds for obligations borrowers aren't paying until the successor program is put in place at the end of May.

"The VA needs to provide a detailed plan on how servicers will be reimbursed for advancing payments on behalf of borrowers," the Mortgage Bankers Association said in a statement.

Litigation around Realtor fees comes to a head

The Department of Justice might be able to revive an investigation into buyer fees that a key industry referral source charges in home sales due to legal developments that arose this year in a way that could change the way the business operates.

"The lawsuits we've seen against real estate brokerages and the settlements and/or judgments will, in my view, fundamentally change the way consumers buy and sell homes," said Jim Milano, partner at law firm McGlinchey Stafford.

Regulators vote to finalize changes to CRA

Community Reinvestment Act evaluations will be based more on loan activity than branch location under a new version of the rule that crossed the finish line this year.

The rule could add to the operational burdens and costs for some large institutions, according to Jason Keller, director, U.S. advisory services, at Wolters Kluwer.

"Those institutions that are about $2 billion to $10 billion in assets will have some changes. But it's really geared toward those institutions with over $10 billion in assets. So that's where the greatest reporting burden and change will happen," he said.