The Community Housing Lenders Association, the national trade association representing Small and Medium Independent Mortgage Banks (IMB), was surprised last January when the Treasury Department and the Federal Housing Finance Agency (FHFA) passed a series of restrictions on Fannie Mae and Freddie Mac. … loans under the revised PSPA agreement governing their Treasury line of credit.
The restrictions limited: (1) the percentage of so-called “high risk” loans at 6 percent of their home loans and 3 percent for refinancing loans, (2) the cumulative percentage of investor and secondary home loans at 7 percent of their loans. business, and (3) the total annual volume of loans that any lender could sell to Fannie or Freddie through the checkout window, worth $ 1.5 billion.
These restrictions are at odds with almost everything the two administrations, Congress and the Federal Reserve, have done in the past 15 months to address the economic challenges posed by COVID-19. Their actions included trillions of dollars in Congressional funding to cushion the economic blow, cheap Federal Reserve funds, a moratorium on evictions, and leniency on homeowners.
PSPA’s January restrictions go 180 degrees the other way. The money window restriction will not take full effect until next year, and the growth of so-called “high risk” loans has not yet slowed down. But the investor / second home limit hit with a vengeance.
It started gradually; Fannie and Freddie told lenders a few months ago that they would impose their total 7 percent limit on each lender. However, this week many lenders received word of mouth from Fannie saying that starting in July, aggregate investor and home loans will be slashed to 3 percent of their GSE loans each month. Failure to meet this limit will result in the loss of their ability to sell such Fannie Mae loans.
We don’t understand why lenders who started making loans after COVID stand out because of these draconian loan restrictions. Investor loans are used to finance rental housing, and with a nationwide moratorium on rent evictions since last spring, many investors have come under financial pressure. Many lenders stepped in to help them refinance their loans to improve their cash flow, and to issue purchase loans to stabilize the market – and those same lenders are being encouraged to curtail these efforts.
So on Wednesday, CHLA sent letter to Treasury, FHFA and Fannie Mae, expressing serious concern about these restrictions and asking Fannie to lift these serious restrictions.
Our letter holds an important perspective on this development – the drastic reduction in loans is caused by an unnecessary provision in the January PSPA, which retroactively based these restrictions on previous loan volumes – initially even taking into account loans issued in January 2020, before COVID even hits!
CHLA opposes all January PSPA restrictions on GSE – and initially urged the Treasury and FHFA to suspend them. But, nevertheless, there is no point in applying them in such a restrictive way. Our letter noted that Fannie publicly stated that it was not in compliance back in February 2021 due to the retroactive function, which did not negatively impact Fannie. Thus, it is clear that there is flexibility in how to implement the constraint.
If the goal is to bring Fannie and Freddie’s percentage of total investor and secondary home loans down to 7 percent, there is an easy way to do it: simply require each lender to stay within that limit quarterly starting in July.
Our letter also emphasizes that these restrictions disproportionately affect IMBs, especially the smaller ones. IMB usually does not provide portfolio loans. But Wall Street banks in a major monetary center may issue non-GSE portfolio loans to cover loans in excess of the limit – potentially even to generate arbitrage profits by securitizing them later in the form of GSE loans when the limits are either lifted or not an issue.
All of our small and medium-sized IMB members are asked to provide qualified borrowers with affordable mortgage loans without arbitrary and unnecessary restrictions.