Editor's note: This feature appears in the June 2021 print issue of DS News magazine, available here.
It’s summer 2021, and America is in the emerging aftermath of a global pandemic that ignited in 2019 and blazed through 2020. As the industry works to return to normal as well as prepare for the challenges ahead, it will be up to experts in the field to adapt and lead while also navigating unfamiliar terrain.
Housing survived and thrived through 2020, even as unemployment and economic devastation swept the nation, due in large part to unprecedented government support.
However, federal responses to the pandemic, policy updates, and changes in leadership rattled the mortgage finance world, and pundits suggest we brace for aftereffects in the weeks, months, and years to come.
EXPECT THE BEST, PREPARE FOR THE WORST
It is important to remember that there were two significantly different tales told by Americans during the height of the coronavirus pandemic, says Ron Haynie, SVP Housing Finance Policy, Independent Community Bankers of America. Some transitioned to remote work and never missed a beat. Others struggled mightily, becoming ill or losing jobs, and for that second group, COVID-19-related forbearance programs and their multiple extensions were lifesaving and unprecedented.
“The financial crisis of 2007-2010 wasn’t like this. You didn’t have Fannie Mae and Freddie Mac and FHA and VA, everyone, including Congress, mandating forbearance for borrowers who are struggling to pay their mortgages,” Haynie said. “It looks like we learned something from that.”
The latest Black Knight report on forbearance activity shows 2.18 million homeowners utilizing the programs, with June expirations numbering about 830,000. Haynie points out that people have been transitioning out of forbearance every day, so while we could see a bubble, there is not likely to be this mass exodus as COVID-19-related forbearance allowances expire. Still, those numbers mean millions of borrowers will require assistance from default servicing professionals.
"The CFPB has been pretty clear that servicers need to be very, very ready with things like staffing and having people who can handle these situations,” Haynie said. “These are not quick phone calls—you need people that are trained. The CFPB has put the industry on notice that you need to be ready to take care of this.”
Many borrowers in forbearance today have the option to list their property and make a profit, which was not the case during the previous financial crisis.
It’s an undeniably difficult time to purchase a new home, but selling is a way out that is more attractive than foreclosure, Haynie said. “And [the seller] could probably do pretty well in most places across the country, where home prices have rapidly appreciated.”
Though he agrees the federal response to the COVID-19 crisis was substantially more effective than anything seen during the last financial crisis, Tim Rood, Head of Industry Relations at SitusAMC, says he ultimately would prefer the federal government buy the homes or mortgages of distressed
households than continue on a course of repeated forbearances and foreclosure moratoriums, which require servicers to finance the government’s policies and create unconscionable hardships for mom-and-pop investors.
Striking a balance between protecting struggling families and preserving the integrity of housing finance systems could prove considerably difficult, Rood said.
"My fear is that if we continue to extend these policies that they will eventually erode the confidence of investors and insurers and imperil the integrity of the mortgage and real estate markets."
Rood says about nine in 10 borrowers in forbearance have enough home equity to sell and have sufficient proceeds to cover their transaction and moving costs if they do not qualify for a deferral or modification.
Either way, servicers will be left to sort out and process these foreclosure prevention activities.
"It will be a substantial strain on their capacity and come with considerable costs on top of the financial demands from continuing to advance billions of dollars a month to mortgage-backed securities holders,” Rood said. “Given the universal desire to avoid another foreclosure crisis, servicers will be working through hundreds of thousands of deed-in-lieu and short-sale requests, which tend to be very labor-intensive.
While no one we spoke with expects a great flood of foreclosure activity, Tobias Peter, AEI Housing Center’s Director of Research, says certain neighborhoods with a disproportionate share of high-risk Federal Housing Administration (FHA) lending, may be more at risk than others.
"We are certainly closely watching FHA’s monthly delinquency numbers,” he said. “While they have been declining over the past two months, 14.6% of FHA’s active portfolio currently are delinquent and 11% are seriously delinquent."
The mortgage industry should be especially mindful of all things involving racial equity. That will be the lens through which mortgage lending will be viewed.—Steve Bartlett, Senior Advisory Board Member, Treliant; President & CEO, Financial Services Roundtable (1999-2012), Representative to the U.S. Congress (1991-1993)
CONSIDERING THE CFPB
Steve Bartlett, Senior Board Member at Treliant who previously served as President and CEO of the Financial Services Roundtable and as a U.S. Congress Representative in the 1990s, says servicers should expect much more intense CFPB oversight in 2021.
"The Acting Director [Dave Uejio] and the Director-Nominee [Rohit Chopra] of the CFPB have stated they plan to have a much more aggressive enforcement unit, with emphasis on fair lending and fair servicing, so mortgage servicers who have not done the right thing with forbearance and loss mitigation have a risk from the CFPB,” Bartlett said.
Haynie added, "The last thing you want is to have the CFPB come calling, so I think people are going to be very diligent."
It isn’t as if the previous CFPB Director did an ineffective job, Haynie noted, but dealing with the aftermath of the coronavirus crisis will fall on the shoulders of new leadership.
In order to remain compliant, Bartlett suggests servicers be deliberate and careful when dealing with customers.
“Communicate all available options,” he said. Most importantly, “don’t wait for your customers to contact you," Bartlett added. “You contact them affirmatively.”
In addition, documentation of policies, procedures, and training that was done during the pandemic is critical, Bartlett said.
Tobias Peter suggests that the CFPB’s move to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule until October 1, 2022, is among its most significant 2021 announcements.
He explains: the new QM rule was meant to replace the 43% debt-to-income (DTI) limit with a price-based threshold based on a loan’s annual percentage rate (APR) to the average prime offer rate (APOR).
“The APOR rule is very flawed. It does not capture risk accurately,” he said. “AEI’s analysis shows that for loans with identical APOR rate spreads, default occurrences vary greatly. The APOR also does not ensure responsible access to credit, as it loosens underwriting standards during a boom, which disproportionately harms minorities and lower-income borrowers.”
As a result, he says, it will promote higher-risk loans, which, during a boom, makes housing less affordable, requiring borrowers to take on more debt and more risk. The APOR rule, he adds, accommodates all that.
Peter suggests the Bureau take the opportunity to base its QM rule on a more holistic view of mortgage risk, which is built around actual default experience under stress.
“Such a rule would help borrowers in two important ways,” he said. “First, it would provide them with the information required to make an informed decision on how much default risk they are taking on, and it will not provide more gasoline to home price appreciation that is already threatening to price lower-income and minority households out of the market.”
Steve Bartlett expects fairness and equality to be the No. 1 focus of every agency that determines and enforces the rules by which the mortgage and housing finance industry lives.
He points, for example, to the CFPB’s May report on borrowers during the pandemic, which details distinct challenges for people of color who have mortgages.
“It’s all about characteristics and demographics. The mortgage industry should be especially mindful of all things involving racial equity. That will be the lens through which mortgage lending will be viewed. Fair lending and fair servicing will be the focus,” Bartlett said. “As Secretary Fudge said during her confirmation hearing, ‘It’s time to level the playing field.’”
The Future of FHFA
Several potential changes loom on the Federal Housing Finance Agency (FHFA) horizon. First, there is the government conservatorship of Fannie Mae and Freddie Mac, which it oversees. Will the government-sponsored enterprises be released from the conservatorship under which they were placed after nearly collapsing amid the subprime mortgage crisis? Moreover, will FHFA Director Mark Calabria remain at the head of the Agency?
The U.S. Supreme Court, in Collins v. Mnuchin, could decide any day whether the President has the power to replace FHFA’s Director.
“There is a lot of that speculation at this point,” said Haynie of the pending changes. “But regardless of what happens, the GSEs continue along the path of recapitalization that has begun under Director Calabria.”
And the GSEs need capital—a lot of it—according to Haynie and his peers.
“We would like to see Treasury and FHFA work out the government ownership, if you will, that would permit the GSEs to go into the capital markets and raise equity. That’s because, Haynie explained, “based on retained earnings, it is going to take them a good 10 years to recapitalize." And, he adds, “a lot can happen in 10 years.”
Haynie believes that any new director would still support strong levels of capital, because that protects the taxpayer.
"The last thing that that I think the Biden administration would want would be somehow having to bail out Fannie Mae and Freddie Mac again—that would not be the best way to get re-elected,” Haynie quipped.
Bartlett suggests one would expect any potential replacement to implement policies similar to those of Mel Watt, President Obama’s appointment, which could include the resumption of risk layering, competition with FHA, and cross-subsidies.
Both Peter and Bartlett offer reasons to root against those types of policies.
“Such policy changes would stoke demand and lead to even higher home prices,” Bartlett said.
Peter noted, “Given the current supply shortage, a renewed race to the bottom on lending standards between the GSEs and FHA, as happened under Mel Watt, will not bring in new borrowers, but rather price them out of the market."
In terms of already announced policies, FHFA’s capital rule for GSEs “created a countercyclical adjustment to risk-based capital requirements based on a long-term trend of home prices,” Peter explained.
At year-end of 2020, FHFA noted that home prices were 14% above their long-term trend and are expected to increase significantly in 2021. This means that the GSEs will have to set aside more capital in the future, Peter says, which will increase the cost of mortgage credit.
The effect of some of FHFA’s new rules and proposals is unclear, Bartlett told DS News.
Take the FHFA’s “living will” act, which requires Fannie and Freddie to develop credible resolution plans, also known as “living wills." Bartlett says this requirement should protect both taxpayers and the mortgage market. He also wonders why it was not required long ago.
“The GSEs have been in conservatorship for a decade, with little political will for a permanent structure. While long overdue, the fact that the new rule gives Fannie and Freddie two years to come up with resolution plans after a decade in conservatorship makes you wonder.”
A new refinance option offered by FHFA for low-income borrowers who missed out on the refi boom could prove advantageous for both borrowers and the mortgage market as rates go up and refinance volumes slow, Bartlett added.
Another recent development, the senior preferred stock purchase agreements (PSPA) between the FHFA and the Treasury from January limited the GSEs’ exposure to second and investor home loans, says Peter, who believes these limits are appropriate. He suggests that “the private sector is capable of handling the volume without a taxpayer guarantee.”
Under the leadership of Director Calabria, the GSEs have undertaken prudent reforms to limit their exposure to risky loans, Peter continued. “The PSPA limited the GSEs’ exposure to 6% for risk-layered loans, which FHFA defined as those with down payments of less than 10%, credit scores of less than 680, and DTIs of greater than 45%.”
WHAT'S AHEAD FOR HUD/FHA
In March, Marcia Fudge was sworn in as the eighteenth HUD Secretary. She’s the second Black woman in history to hold the position.
Fudge has said that her desire is to make the dream of homeownership—and the security and wealth creation that comes with it—a reality for more Americans.
Steve Bartlett says, so far, HUD has been “remarkably quiet in 2021” but he expects the department to be “increasingly assertive.”
“Secretary Fudge is very capable and highly regarded on Capitol Hill. She will likely emphasize racial equity in her agenda, among other priorities. She also is quite committed to the alleviation of poverty,” Bartlett said. “But her exact housing priorities have yet to be announced. As she said at her confirmation hearing, her first priority was to provide rental assistance to households at risk of eviction. Now that we are opening up again, we should see some focused plans from HUD to end discriminatory housing policies.”
Some experts are also praising what Fudge has not done.
Shortly after her Senate confirmation, Secretary Fudge ruled out calls for an FHA mortgage insurance premium cut.
This was welcome news to Tobias Peter, who contributed to a paper entitled “The Impact of Federal Housing Policy on Housing Demand and Homeownership,” which examined a similar cut made in 2015 and found that it did not live up to its billing.
“At the time, the FHA claimed that the premium drop would result in 250,000 new first-time buyers over the next three years and save each FHA buyer $900 annually.
“Our research found that even though FHA’s loan volume increased substantially in the first year after the 2015 premium cut, only about 17,000 were new first-time buyers who wouldn’t have bought homes absent the premium cut, far short of FHA’s prediction. The rest were borrowers poached from other federal agencies or buyers who purchased homes unrelatedly to the premium drop.”
His research also revealed that prices went up for non-FHA buyers in neighborhoods with FHA-insured sales.
“After all, it is one housing market, where borrowers, no matter the financing, compete for houses,” Peter explained. “This caused the non-FHA buyers, who did not receive the benefit of lower premiums, to largely offset the price increase by buying a home of lesser quality, perhaps a smaller home, a smaller lot, or in a different location.”
It comes back to the supply shortage, he says. “In today’s hot housing market, any policy that stokes demand against a limited supply will fail similarly.”
He says that while some voices continue to call for a renewed MIP cut or for down payment assistance, given the current supply shortage, such policies will not benefit prospective buyers, and he hopes Secretary Fudge “will withstand such calls."