Fannie Mae: The Mortgage Markets Are Changing – Bove
Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses the change in mortgage markets and the coming end of Fannie Mae and Freddie Mac.
As with most changes in the overall financial markets, the adjustments in the mortgage markets are not being felt by the public. The public wants 30-year fixed rate mortgages and they remain freely available. If banks are not willing to make these loans others have stepped into the breach. Some sources reported by Inside Mortgage Finance indicate that over 50% of purchase mortgage originations are being made by non-bank financial sources.
Yet the underlying structure of the mortgage market has changed. Some changes are apparent in the rules and others are basically emerging as new conventional practices emerge:
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- The key rule changes were published by the Consumer Financial Protection Bureau (CFPB) and are called the Qualified Mortgage rules (QMR). They require 20% down payments and total debt payment to income ratios of below 43% in order to qualify a mortgage loan. Banks are allowed to write non-qualified loans but they are heavily penalized if these loans default.
- Conforming loans (those accepted by Fannie Mae and Freddie Mac) allow loan originators to avoid the more onerous part of the QMRs because Fannie and Freddie will insure loans that have 3% down payments.
- The Federal Housing Finance Agency (FHFA) has indicated that the maximum amount that can be loaned under a conforming mortgage remains, as it has for the past 11 years, at $419,000. In jurisdictions where housing prices are much higher the maximum amount for a conforming mortgage is $625,000.
- Fannie Mae and Freddie Mac are no longer willing to buy mortgages for their own portfolios (although some of this does happen). They now simply function as financial insurance companies, guaranteeing mortgages for a fee so that the loans can be sold to others in packages.
- The government is also working very hard to develop mechanisms whereby the private sector shares risk with Fannie and Freddie on the guaranteed loan packages. Some banks like Wells Fargo (WFC/$55.18/Buy) have entered into these agreements.
- Under current regulations, both Fannie Mae and Freddie Mac will cease to exist by December 31, 2017.
- The new risk weighted asset (RWA) rules carry heavy capital penalties for lenders who wish to package and sell loans into the private secondary markets.
- The key thrust of the regulators, now, is to assist in the funding of multi-family units because the government is committed to leaving the single family housing finance industry.
These rules are causing the markets to adjust but not so much, as mentioned, that the public sees changes. For example,
- Banks, in general, are avoiding making any loans insured by the Federal Housing Agency (FHA) because of a general belief that this agency does not stand behind its insurance.
- There are virtually no RMBS being issued due to the heavy penalties associated with these packages if they fail.
- There has been an increased willingness to make the so-called Jumbo (non-conforming) loans. The increased competition (1 in every five mortgage loans is now a jumbo) has driven rates on these loans lower.
- Non-banks are making the most conforming loans and selling them to Fannie Mae and Freddie Mac or Ginnie Mae with an FHA guarantee. Banks are dominating the jumbo category with loans that carry greater risk (many interest-only loans).
- The duration on loans that banks hold has been reduced. Long-dated loans go to Fannie Mae and Freddie Mac, where possible, or are sold as whole loans to third party buyers.
In periods like this when the demand for funds is relatively weak, money gravitates to investments like mortgages. Thus, there is plenty of funding available at the moment. It is very hard to envision that when the economy strengthens and rates rise in real terms that money will be available to fund housing given the new structure of the market. Plus, if Fannie Mae and Freddie Mac actually do go away in 2017 so will a big chunk of the housing market.
Buying housing will be something that only the very wealthy will be able to do.