Opinion

Just call it the Calabria Refinance Tax

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A while back, we took Ginnie Mae to task for issuing new guidelines on early buyouts of reperforming loans (“The problem with Ginnie Mae's new restrictions”). We knew at the time that the folks at Ginnie Mae did not like making the changes, but perhaps should have said as much. And since then, several officials at HUD told us emphatically that they are not in the business of managing prepayment rates.

“As with refinances, buyouts can cause an economic loss for security holders when mortgage-backed securities trade at premium prices. As a general matter, the risk of such losses is a normal consequence of investing in this asset class,” HUD noted in a blog post (“Ginnie Mae announces temporary pooling restrictions for re-performing mortgage loans”).

The mortgage industry was not happy with the Ginnie Mae changes either, but it adjusted and continued to focus on record loan production volumes. Big banks like Wells Fargo will indeed continue to do early buyouts of delinquent Ginnie Mae loans — and will keep them in portfolio.

It is important to state that Ginnie Mae and its issuers ultimately work together because of the commonality of purpose and need. Ginnie Mae acts with and through its bank and nonbank issuers, creating an important reason for compromise and constructive action to protect consumers and the securities market for Ginnie Mae mortgage-backed securities.

Sadly, the market for conventional loans lacks this basic consensus, in large part because the Federal Housing Finance Agency is a fundamentally conflicted agency. While the GSEs own the loans in conventional MBS, they allow issuers to service these residential mortgage loans — assets that Fannie and Freddie ultimately guarantee.

This week it was announced that “Fannie Mae and Freddie Mac will impose an “adverse market fee” of 0.5% on most refinanced mortgages starting Sept. 1 due to economic uncertainty,” reports Hannah Lang in NMN. “The forthcoming adverse market fee could effectively raise costs for consumers looking to refinance, to the tune of $1,400 for the average consumer, the Mortgage Bankers Association is estimating.”

The ill-considered action by the FHFA shows just how deep is the potential capital deficit to support losses lurking inside Fannie Mae and Freddie Mac. The FHFA is conflicted between supporting the finances of the enterprises, which it wants to see privatized, and acting as a prudential regulator. The actions taken by FHFA Director Mark Calabria to advantage the private shareholders of Fannie Mae and Freddie Mae ultimately cost the taxpayer.

And the FHFA action illustrates, yet again, another conflict between an objective mortgage regulator and the economic program pursued by the Federal Open Market Committee. Think of the change that takes effect Sept. 1 as an early scene from the film “The Godfather.” Vito Corleone tells his son Michael that he must “wet his beak.”

Calabria effectively is confiscating one-third of the 150 bp net profit on retail mortgage business, but most of the 70 bps or so that is typically made on correspondent lending. One wonders if the FHFA considered the economic impact of their actions, especially on smaller issuers and lower income households. Probably not.

But perhaps more ominously, the FHFA action is directly in conflict with the policy of the FOMC, which is deliberately using low interest rates and high volumes of loan refinancing in all sectors to reflate the crippled U.S. economy. One could even characterize the actions of Calabria as an attempt to sabotage the FOMC’s action and the economic recovery that is the focal point of the Trump White House.

"Tonight's announcement by the GSEs flies in the face of the administration's recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners,” said Mortgage Bankers Association CEO Bob Broeksmit.

“Director Calabria's directive requiring Fannie Mae and Freddie Mac to impose a 50 basis point price increase on all refinances effective Sept. 1 is a stunningly brazen confiscation, and it must not stand. It will first cost lenders hundreds of millions of dollars as the bulk of your enormous locked pipelines cannot be closed and delivered by the end of August, and it will, starting today, cost consumers billions in the midst of a pandemic when the administration claims to be working to get relief and stimulus to the struggling economy.”

While the move will increase the cost of a loan to consumers, the industry will continue pretty much as usual because the monthly payment will only rise a couple of dollars. But in aggregate, the change by Calabria will shift billions out of the hands of American consumers and into the hands of Fannie Mae and Freddie Mac — and their private shareholders.

How does Calabria justify this grotesque conflict of interest on the part of his office? House Financial Services Chair Maxine Waters, D-Calif., ought to ask Calabria that very question.

The FHFA press-meisters tried to spin the sudden and inexplicable change as being made at the request of the GSEs themselves. In fact, NMN has been told by several FHFA officials, the managers of Fannie and Freddie did not even know about the change until hours before it was announced.

Once again, Calabria’s unconventional ideas and lack of experience in finance seem to have created yet another political storm for President Trump, who needs the support of the housing industry to defeat Joe Biden and Kamala Harris in November.

“The FHFA could have at least made the change effective Oct. 1,” one angry issuer told NMN. “This change will cost me millions of dollars on loans in pipeline that did not price in this loan-level pricing adjustment. Our total cost of production for conventional refinance loans just went up $1,400. We’ll lose that much on every pipeline loan we sell to the GSEs now.”

As this comment went to press, the leaders of the mortgage industry are calling on Director Calabria to reverse his decision and roll back the 50 bp LLPA for conventional refinance loans. But whether or not the FHFA relents and changes his latest pronouncement, the fact is that strong mortgage refinance volumes are likely to persist.

The cost of the Calabria Refinance Tax will fall most heavily on low income households, which tend to see inferior execution in good times but suffer the most when issuers are making choices about which loans to close and which loans to discard. That is the true cost of the Calabria Tax on mortgage refinance.

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FHFA Freddie Mac Fannie Mae GSEs Refinance Correspondent Mark Calabria
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