Good Thursday AM,
Lots of news today. Bonds started off strong and are fading fast. Stocks are not doing well, but a bit better than bonds. The 10-yr was at .50 a week ago, today at .72. That is a .25% rate adjustment. We got some good news on Jobless claims this week. Although they are still through the roof, they came in much better than expected. This is good for the economy and bad for bonds. We have blown through several lines of support and have to hope we get a footing here. I do think we will rebound, but it will take a bit. Hopefully you locked. To add insult FHFA, who is in charge of all things for conventional loans, after hours yesterday imposed a .50% fee for all refinance transactions. Yes, that is correct. .50 and on all refinances. Yes, hopefully your loans are locked.
Matt Graham shared (it is wordy but worth the read):
This has instantly created a very big mess in the mortgage market, and a ton of anger–justifiably so! For those who don’t really understand it, let’s break it down in even shorter, simpler terms.
The FHFA announced a new hit on all conventional refis (except certain construction-to-perm loans) effective for loans delivered to Fannie/Freddie on 9/1 or later. That applies to any conventional refi that isn’t currently locked and that can’t close before the end of next week (depending on the lender… they need time to get the loan to the GSEs and for the GSEs to purchase them).
- The hit is 0.50% of the loan amount (i.e. $1500 on a $300k loan).
- It will be applied as an LLPA although many lenders have simply raised costs today and will implement the LLPA shortly
- Lenders will be eating this fee on loans that are already locked
- Multiple lenders repriced for the worse last night (latest reprices we’ve ever seen, suggesting many lenders were truly caught off guard).
- Other lenders simply hit rate sheets this morning, ironically affecting the purchase mortgages that were not supposed to be affected by this.
Why is this happening? FHFA’s party line this fee is due to “market and economic uncertainty.” For those who’d like to geek out on the potentially valid, esoteric justifications, here are two links that might help build that case:
The thesis is that GSEs are hitting the time frame where they have to cover servicing deficiencies due to covid-related forbearances at the same time that their capital requirements are becoming more onerous. Truly, this is not a bad counterpoint, but if it’s truly the justification, why are purchases not affected? And why now as opposed to a month ago? Why roll it out in a way that immediately hits the biggest lenders for 10s of millions of dollars unexpectedly? Why roll it out in a way that instantly and unavoidably makes homeownership more expensive and that hits the pocketbooks of millions of Americans eager to take advantage of record-low rates?
Why is this really happening?
I’m a big fan of the middle path and balanced viewpoints. My views have been (and mostly continue to be) fairly one-sided on this topic–largely due to how it was communicated and the other considerations mentioned above. I will entertain that there is a middle ground here and you should too (based on the two links above). That said, what follows is the more cynical–and in my opinion, more defensible–view.
Lender margins are very wide for a few reasons (a combination of latent covid-related uncertainty but mostly overwhelmed capacity). FHFA can plainly see this and FHFA would like more money for GSEs.
In other words, FHFA is basically saying “we see you have quite a bit of extra money there and we think some of your money should be our money instead.”
If that seems a bit cynical and reactionary to you, consider the following:
Again, why now versus a month or two ago? The writing on the wall was certainly there. The only thing that’s really changed is the revelation of very wide lender margins–especially on refis.
Why wouldn’t this apply to purchase mortgages? (see the previous bullet point)
Why is the FHFA implementing this in a way that blindsides lenders, costs them a significant amount of money instantly, and forces them to pass those costs on to consumers by varying degrees? This is the hardest one for me to reconcile. I really can’t come up with any way to view this in a constructive light. In fact, it seems like fairly damning evidence that the move was made with some level of disdain for the mortgage industry on the part of FHFA.
To help flesh out my assessment, let’s consider a few comments by Bob Broeksmit, president of the MBA. I’ve been impressed with Bob’s comments throughout 2020 as they strike a difficult-to-achieve balance of forcefulness, emotion, logic, and diplomacy. In today’s note to MBA members, he was as animated as I’ve seen him in defense of the mortgage industry. Here are a few highlights:
“As I think you all know, I do not traffic in hyperbole, but Director Calabria’s directive requiring Fannie Mae and Freddie Mac to impose a fifty basis point price increase on all refinances effective September 1st 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. “
In referencing the purchase vs refi issue mentioned above, Broeksmit says “Refinances, generally speaking, are less risky than purchases, and there is no increase in pricing for purchases. Let’s face it – in order for the GSEs to make a refinance loan, the borrower must be paying timely on the current loan, and since most refinances reduce the monthly payment, how can they be more risky than the current historically high guaranty fees contemplate? I have seen this move referred to as a “cash grab,” which sounds apt to me. “
He goes on to highlight attempts to contact FHFA and the GSEs starting on Monday without a reply. In fact, even now there is no update or press release directly from the FHFA. Just the implementation of the fee through the GSEs. Not even a Ray Liotta meme! Bob’s take: “Make no mistake – FHFA knew that this absurdly short implementation window would mean that lenders would bear the brunt of the cost of this on your locked pipelines, and yet they proceeded.”
His closing thoughts need no preface from me: “For the GSEs to add a 50-basis point surcharge on refinances when the nation is struggling with the greatest economic downturn since the Great Depression is outrageous. We will shout from the mountaintops, ourselves and together with other organizations, reaching the media, elected representatives, and policymakers, and I urge you to do the same. Call your Senators and Representatives. This is still America, and we cannot sit still in the face of this wholly unwarranted confiscation.”
Find MBA’s call to action here: https://www.votervoice.net/MBA/campaigns/76617/respond
Please remains safe and stay healthy, make today great!