FHFA under Fire

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“Summertime and the livin’ is easy.” So goes the classic George Gershwin song from “Porgy and Bess.”

And it might be … unless you are a federal mortgage regulator aiming to grow sustainable homeownership across borrowers of every income strata.

In that case, the fish ain’t biting, but Congress is.

Capital Commentary takes a look at what has some elected officials on Capitol Hill up in arms about policy decisions at the Federal Housing Finance Agency (FHFA).

1. Big Thing: FHFA Feels Heat on Hill

The dog days of summer haven’t yet hit Washington, but the temperature was plenty hot for the FHFA at two House committees investigating the regulator’s decisions on the mortgage market.

Why it matters: Fannie Mae and Freddie Mac purchase about 70% of the mortgages originated in the U.S. Every pricing change or underwriting tweak reverberates throughout the mortgage ecosystem — affecting lenders, servicers, insurers, settlement service providers and, of course, borrowers.

• The Housing and Insurance Subcommittee took aim at recent changes to the GSEs’ Loan-Level Pricing Adjustments (LLPAs). (See below, Item 2.)
• The full House Financial Services Committee questioned FHFA Director Sandra Thompson for four hours on a wide array of issues before her agency, including those pricing adjustments. (See below, Item 3.)

2. LLPAs: Bad Politics or Good Policy?

Chairman Warren Davidson, R-Ohio, titled his Housing and Insurance Subcommittee hearing “The Current Mortgage Market: Undermining Housing Affordability With Politics.” (View it here.)

Why it matters: Republicans see the loan-pricing changes, which resulted in higher LLPAs for some lower-risk borrowers, as an election-year issue that can attract middle-class voters to the GOP. They ganged up on FHFA, which wasn’t represented among four witnesses called to testify.

What they’re saying: The pricing changes “are alarming because they disproportionately increase fees for borrowers who have higher credit scores,” Davidson said in his opening comment. “Any way you slice it, prices will go up for consumers who have credit scores above 680 and even for some of those with down payments of more than 30%.”

• “When I first read the proposal that we’re going to charge people with good credit more and we’re going to charge people with poor credit less, I thought it was a bad joke,” said Rep. Bill Posey, R-Florida.

Yes, but: FHFA attributes the LLPA changes largely to higher capital requirements imposed on the GSEs and realigning the fees to correspond to expected future losses. The agency found support for that among some of the witnesses.

• The LLPA changes “appear to be reasonably aligned with credit risk after accounting for the new capital framework, the cost of private mortgage insurance and historical default and loss data,” said Edward DeMarco, President of the Housing Policy Council and formerly Acting Director of FHFA.
• “I want to emphasize that the recent adjustments to the LLPAs do not in any way compromise the safety and soundness of the GSEs,” said Janneke Ratcliffe, Vice President of the Urban Institute’s Housing Policy Center. “Secondly, rather than thinking about these adjustments as new cross-subsidies, they should be viewed in light of a series of changes made by the director to better align pricing with the capital requirements established by the prior director (Mark Calabria).”

Davidson introduced The Middle-Class Borrower Protection Act of 2023, which would roll back the LLPA changes.

The bottom line: The legislation is unlikely to be enacted, but there will be pressure on FHFA to become more transparent about its pricing going forward.

3. FHFA Director Grilled on Credit Scores, Title Insurance Powers

When FHFA Director Thompson appeared before the full House Financial Services Committee for a hearing on FHFA oversight, she faced a barrage of questions from Republicans and Democrats beyond LLPA changes, notably:

• GSE alternatives to title insurance.
• Implementation of new credit scoring models.

Why it matters: The title insurance industry flexed its muscles by encouraging committee members to question the use of Attorney Opinion Letters as a substitute for title insurance. Meanwhile, some committee members expressed concern that a new policy recommending lenders use credit scores from only two credit bureaus — rather than three — would increase risk for the GSEs.

What they’re saying: Rep. Brad Sherman, D-California, a former closing attorney, worried that homeowners wouldn’t be sufficiently protected without a full title insurance policy:

“They have to prove that the attorney was negligent … [Then] you’ve got to hope you can sue that attorney and prove to a jury that it was their fault. And hope that they’re adequately insured.”

Rep. Bill Timmons, R-South Carolina, thinks Fannie Mae is stepping into the primary market by reportedly planning an alternative to title insurance:

“It surprised me to find out that Fannie Mae is preparing to develop a way to waive the title insurance requirement for loans purchased by the GSE. Title insurance is a primary market activity that’s well outside of Fannie Mae’s mission and is the clearest example to date of Biden administration overreach.”

Regarding the move from tri- to bi-merge credit reports, Rep. Ann Wagner, R-Missouri, expressed the feelings of a number of committee members:

“I am sure that you would agree that relying on incomplete and imprecise data raises the possibility of another GSE-policy-created mortgage crisis. Lenders cannot accurately price risk and manage their mortgage-related exposures if they are relying on [a] limited picture of borrowers’ credit files. The taxpayers will pay the cost if mortgage defaults increase.”

4. Next PolicyCast: How Calabria Staved Off Disaster During COVID

Mark Calabria, former FHFA Director under President Trump, will join the Arch MI PolicyCast to discuss his new book, “Shelter from the Storm,” about the steps he and his agency took to prevent a housing disaster during the COVID-19 pandemic.

Why it matters: Many of the procedures Calabria put into action, such as forbearance, are likely to become the option of choice for mortgage servicers and government agencies in future economic downturns.

Watch for a notice in your email box when the next PolicyCast is posted.