As anticipated as recently as yesterday, the next round of U.S. end-game capital proposals will include a significant win for bankers when it comes to residential mortgage origination. Where it comes out on other key mortgage topics is, though, yet to be revealed….
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In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance. We reviewed our forecast at the start of this year on exactly this point. Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons. Our updated, complete forecast follows….
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In the fog in which FSOC chooses to nestle, it was easy to miss an important indication briefly mentioned in the meeting’s readout: the Council is “reviewing” current financial-market utility (FMU) designations. Firm-specific and activity-and-practice designations usually get all the airtime. So it was again on Friday, when FSOC also decided to back off its plan just last November (see Client Report FSOC29) to designate nonbank mortgage banking. The Council in fact mostly backs off much of what it promises – no wonder Rohit Chopra calls it a “book-report club.” Precedent thus suggests the FMU threat is idle, but I’ll bet it’s not.
Why? The FMUs the Council is reviewing were made in 2012 very shortly after Dodd-Frank was enacted in 2010 and told it to do so. FMUs are to supplement firm designation because one clear lesson of the 2008 crisis is that market infrastructure matters at least as much as very big banks and a nonbank or two. FMU designations are thus designed to ensure proper functioning of the “clearing and settlement of payment, securities, and other financial transactions” (see FSM Report PAYMENT11). Designated payment companies are subject to Federal Reserve systemic supervision and securities and derivatives entities fall under either the SEC or CFTC. Unlike the Council’s extremely-controversial designation at about the same time of four systemically-important financial institutions, the FMU designations then and ever since have drawn little scrutiny and no political dispute. Indeed, when Donald Trump’s Treasury led a 2019 rewrite of the …
We have reviewed the 2024 scorecards FHFA released for Fannie and Freddie. Unlike prior years, it contains no new initiatives or aspirations, largely holding Fannie and Freddie to account for much of what they’ve been asked to do before. Fannie is given indirect encouragement to continue its title-insurance plans, but that’s only if it comports with added cost-efficiency under several longstanding FHFA goals….
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A new FRB-NY study confirms that 83% of loans from 2000-2022 went to first-time homebuyers, compared to 56% for the GSEs and 57% for private lenders. FHA loans of course have very high LTVs and low scores, with scores improving after 2008 when the PLS market stopped adversely selected FHA even though over half of FHA loans still have scores under 680. FHA sustainability has varied based on these and other factors, but 21.8% of borrowers from 2011-2016 still lost their homes.
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Our most recent analysis of the inter-agency capital proposal focuses on significant changes to the rules for securitization and credit-risk transfer positions. In short, super-traditional securitizations have an easier path to the secondary market, but GSEs still beat banks. Complex ABS face often-formidable obstacles, as does CRT given or taken by banks.
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In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….
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As we will detail in a forthcoming in-depth report, the banking agencies’ new “guidance” on third-party vendors essentially brings all nonbank counterparties with whom banking organizations deal under the agencies’ enforcement thumb. As a result, nonbank mortgage companies, MIs, credit enhancers, and tech providers and even the GSEs – Home Loan Banks included – will be forced at the least to answer a lot of questions from the banking entities with whom they do pretty much any kind of business. And, if the agencies don’t like the answers, they now assert that they will issue enforcement orders not just against banks, but also nonbank entities to ensure they comply with the full panoply of safety-and-soundness standards referenced in the guidance along with ensuring appropriate consumer protection.
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FSOC’s newly-proposed analytical methodology for systemic risk identification is most immediately important for nonbank mortgage companies and the regulated institutions that love them. It may look as if a U.S. systemic framework is months away, but FSOC has signaled that, in some cases, systemic interventions could well come sooner.
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In this report, we build on FedFin’s in-depth reports about recent bank failures to detail new risks for all of the innocent bystanders in the U.S. mortgage market along with a not so-innocent bystander: the Federal Home Loan Banks. We note also some take-aways FHFA may draw from the crisis with regard to GSE regulation, resolution, and supervision. In short, things will be different assuming they don’t get worse and then still more of a paradigm shift.
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