MBA Urges Treasury, FHFA to Reconsider GSE Purchase Caps

The Mortgage Bankers Association on Monday asked for a meeting with Treasury and Federal Housing Finance Agency officials to address MBA member concerns over newly imposed limits on government-sponsored enterprise operations that could cause potential disruptions to the housing finance system.

The letter to Treasury Secretary Janet Yellen and FHFA Director Mark Calabria specifically cites amendments to GSE Senior Preferred Stock Purchase Agreements announced this past January. The amendments included provisions to enhance clarity on milestones necessary for the GSEs to exit conservatorship, and were intended to promote stability in the mortgage market.

MBA welcomed certain provisions of the PSPA amendments allowing the GSEs to build capital while remaining in conservatorship until other reforms are implemented. MBA also welcomed the codification of conservatorship directives that prohibit the GSEs from varying the pricing or other terms of their loan acquisitions based on lender size, charter type or volume of business.

However, MBA raised concerns when the PSPAs were released that certain restrictions on product-type purchases and cash window deliveries would be difficult to implement and could impair market functioning. MBA President & CEO Robert Broeksmit, CMB said MBA is concerned that limits on certain features of the Enterprises’ businesses, as well as the manner in which these limits are implemented, “could cause unnecessary disruptions in the housing finance system.” Specific concerns are outlined below:

Product Limits

The revised PSPAs feature several provisions limiting GSE acquisitions of certain types of loans. One such provision requires the GSEs to limit “acquisitions of Single-Family Mortgage Loans secured by either investment properties or second homes to not more than 7 percent of the Single-Family Mortgage Loans acquired…during the preceding 52-week period.”   The PSPAs also imposed caps on loans exhibiting “higher risk” characteristics – mortgages with 2 or more of the following features:  credit scores below 680, combined loan-to-value ratios above 90%, or debt-to-income ratios above 45%.  The GSE will face hard caps of 6% on purchases and 3% on refinances of such “higher risk” loans.  In the past week, the GSEs have begun reaching out to lenders implement the investor/2nd home caps. 

MBA said when the amendments to the PSPAs were announced, Treasury noted that these limits were “aligned with [the Enterprises’] current levels” of investment property and second home acquisitions. Market volumes in these segments in 2020, however, were lower than in prior years, and data from recent months suggest that heightened sales and refinance activity in these segments is driving an increase in GSE acquisitions of these loans. As the GSEs have begun to implement the investor/2nd home caps in the past week, the market for these loans has deteriorated significantly as investors impose loan level price adjustments to avoid getting an excessive volume of loans that the GSEs cannot purchase.  It is not clear that private market participants currently have the capacity or resources to absorb the entirety of the gap between the GSE limits and the volume needed to satisfy underlying demand.   

MBA is deeply concerned that this same approach to the investor/2nd home caps will be implemented on the higher risk loan category, resulting in a similar market reaction — higher rates, tighter underwriting and reduced availability of credit for these loans, which predominantly serve first-time buyers and low- to moderate-income families. 

In the near term, MBA has urged Treasury and FHFA to provide immediate guidance to the GSEs allowing them to more gradually manage their aggregate books of business below the cap levels contained in the PSPAs to reduce market disruptions.  “Under a more flexible approach and timeline, the Enterprises could make necessary adjustments to their automated underwriting systems, which would alleviate concerns about existing loan pipelines and better protect against market disruptions. Gradual changes also would provide time for private capital alternatives to develop the operational capacity to serve these market segments,” MBA said.  

Cash Window Limits

MBA also expressed concern that a provision limiting the use of the GSEs’ “cash windows” by certain lenders could have unintended consequences for borrowers, lenders, investors and the GSEs. The revised PSPAs include a requirement that, beginning January 1, 2022, the GSEs shall “not acquire for cash consideration from any single seller…during any period comprising four calendar quarters Single-Family Mortgage Loans with an unpaid principal balance in excess of $1.5 billion.”

“This requirement will force many lenders – perhaps several dozen – to curtail their use of the Enterprises’ cash windows,” MBA warned. “These lenders will need to pursue alternative approaches to avoid breaching this threshold, including greater use of – or development of the capacity to engage in – mortgage-backed security swaps, sales of loans to correspondent aggregators, or shifting of their business mix to other loan products.”

Multifamily Mortgage Purchase Activity

MBA noted the revised PSPAs limit the GSEs’ acquisition of multifamily mortgages to $80 billion in any 52-week period, except as adjusted annually by reference to the Consumer Price Index as published by the Bureau of Labor Statistics. The revisions also specify that at least 50 percent of multifamily mortgage assets acquired in any calendar year be “mission-driven.”

MBA said because multifamily limits are based on a combination of a target market share for the GSEs together with a projection of the size of the overall multifamily market—measures the CPI does not track—over time the multifamily limits could stray from FHFA’s and Treasury’s assumptions and intentions as to the target market share. MBA also expressed concern that the lack of flexibility to adjust the PSPA multifamily limits, if necessary, could “hinder the ability of the Enterprises to fulfill their housing missions of providing liquidity in multifamily markets under all market conditions.”

“We believe that FHFA, Treasury, the Enterprises, multifamily markets, and renters would benefit from the issuance of guidance, revisions, or protocols to provide a path for adjusting PSPA multifamily limits, if necessary, in response to substantial changes in market conditions,” MBA said. “Given the importance of these issues and the necessary changes to internal operations that many lenders (and the Enterprises) will need to implement, we respectfully request a meeting with you or your designees to discuss the concerns and questions that we have presented.”