Will Biden-era Fannie Mae, Freddie Mac policy help community lenders?

The effectiveness of the Biden administration’s efforts to house more low- to moderate-income borrowers is partially reliant on the ability of community lenders to originate loan products the government-related secondary market is buying and securitizing to that end. But some community lenders find red tape and related expenses are hurdles to financing affordable housing, sometimes forcing smaller-scale players to limit themselves to working with aggregators and reducing their options for secondary market sales, related earnings, and how many LMI loans they can originate.

“Raising the cost of lending ultimately hurts the borrower,” said Marc Shenkman, president and co-founder of Priority Financial Network.

While these lenders may not always work directly with agencies like Fannie Mae or Freddie, they are key sources of the mission-critical loans that end up being aggregated for sale to the two government-sponsored enterprises, potentially helping the primary and secondary market make inroads into an untapped $300 billion market of potential low- to moderate-income consumers.

“It can be really hard when you talk to a large company about affordable housing goals,” said Tai Christensen, diversity, equity and inclusion officer at CBC Mortgage Agency, the administrator of a down payment assistance Chenoa Fund that supports low-income and minority lending. “Community lenders or local branch offices are often the ones that really know the needs of their neighborhoods.”

Although the neighboring government market in some cases still has more expansive criteria for low-income borrowers than the government-sponsored enterprises, some local and regional lenders are leaning more on Fannie and Freddie’s programs to serve their customers when possible given cost hurdles for mortgage companies and borrowers in the former market.

“The new approach of [the GSEs’ regulator, the Federal Home Finance Agency] toward access to credit is something we like,” said Scott Olson, executive director of the Community Home Lenders Association. “I think with Ginnie Mae, we’re very concerned about the proposed net worth changes that are still hanging out there, particularly the new risk-based capital proposal. We see, with these sorts of things, that the inevitable result is to crowd out or winnow down smaller players.”

When it comes to fees, the FHFA has considered the possibility of reducing risk-based charges Fannie and Freddie have imposed on some loans since the Great Recession, potentially returning to more even pricing. Some community lenders, particularly those more exclusively focused on affordable housing, like the idea of removing those charges, which effectively serve as a disincentive to lend to LMI borrowers.

“Lenders don't want to be disadvantaged, particularly when we're doing more to serve lower-income borrowers. They have lower scores that affect the profile of loans that we deliver. We don't want to be punished for that,” said Mark Vanderlinden, chief lending officer and secondary markets manager at Homewise Inc., a community development financial institution in Santa Fe, N.M.

With margins shrinking, community lenders may be increasingly concerned about potentially having to charge customers more to maintain their own financial soundness, particularly if they are among those who need to meet counterparty requirements to sell directly with the GSEs.

That said, the kind of loans bought by the GSEs are still more affordable to low-income borrowers than the ones available in the private market, where non-qualified mortgages for consumers with nontraditional incomes extend eligibility but tend to carry higher rates. So without them, the LMI market could be tough to tap.

“Non QM loans are not cheap. They’re not going to help affordable housing,” Shenkman said.

He does think that a government-related affordable lending expansion focused on unlimited homeownership could eventually go too far.

“They tried to make everyone in the United States own a home back in ‘05 ‘06 ‘07. How did that work out?” Shenkman said, referring to a period where exceptionally loose underwriting led to a housing crash and exposed taxpayers to risk by forcing the GSEs into government conservatorship.

However, loan performance and terms have been in better shape than they were then, according to data compiled for an index published by the Urban Institute’s Housing Policy Finance Center. The Federal Housing Finance Agency’s inspector general has determined that the cost of forbearance will be manageable largely because the 50 basis point adverse-market fee on refinances has covered nearly 70% of its projected cost. So, for the time being community lenders are generally thinking more about how they can make more loans and profit than managing credit risk.

But the QM change made under the previous administration and delayed in implementation by the current one is drawing mild concern from some quarters within community lending. It has a lot of support from broader trade groups and bigger players, but specific underwriting criteria used to determine QM status have been replaced by the extent to which a loan is priced above the average prime offer rate for similar products, Olson pointed out. The GSEs have had a temporary QM exemption but that will be removed. Smaller lenders have less wherewithal to manage credit risk than larger ones.

“QM and other things have been pretty responsible, so I don’t see us foaming at the mouth like we were during the last cycle, but we don’t support the recent change,” said Olson. “Basically, the way it’s set up now, it no longer measures a safe loan and whether a person can afford the loan. It measures whether you can find an investor to buy it at a certain price.”

(While a capped debt-to-income ratio and other specific underwriting requirements no longer define QM under the new definition, mortgage companies must still document and consider traditional measures like DTI, credit scores and loan-to-value ratios under broader ability-to-repay requirements when they originate loans, proponents like the Housing Policy Center have noted.)

While the GSEs and the Federal Housing Finance Agency have taken several steps to expand LMI homeowner and renter options — through lending measures such as the suspension of limitations previously added to their Preferred Stock Purchase Agreements, the addition of underwriting based on rental histories for first-time home buyer loans, and lower down payment hurdles for 2- to 4-unit properties, community lenders and affordable housing advocates think more could be done.

Community lenders could originate more mortgages on condominium properties, which sell for less than traditional homes, if they had additional leeway and less red tape from the GSEs, Shenkman said.

It may take some time to see how some of the underwriting expansion done to date will impact underserved LMI owner-occupied or rental housing, but one secondary market development that has immediately improved the general financial position of community institutions and borrowers involved was the PSPA change, said Sadie Gurley, vice president at Maxwell. Gurley leads the company’s due diligence, quality control and capital markets divisions.

“When they lifted the restriction on investor properties and second homes, that caused everybody to increase pricing immediately, and I still think there’s still room to go up because folks are being a little hesitant as to what the next proposal will be,” said Gurley. “That helped them a lot because there were a lot of second-home and investor properties that were well above the current interest rates weren’t getting refinanced."