3 Ways New GSE Limits Will Negatively Impact Mortgage Markets and Underserved Borrowers
In January of 2021, the U.S. Treasury and the Federal Housing Finance Agency (FHFA) released new limits on the GSEs Freddie Mac and Fannie Mae. These limits, which were unveiled as updates to the existing Preferred Stock Purchase Agreements (PSPs), include caps on the GSEs’ purchases of second-home and investor properties as well as on their purchases of “higher risk” loans. While the FHFA argues that the caps are intended to protect the interests of primary home borrowers and the underserved, it is likely these caps will have the opposite of the intended effects.
After the financial crisis of 2008-2009, the FHFA took Fannie Mae and Freddie Mac under conservatorship. Essentially, the U.S. Treasury agreed to financially back the GSEs in exchange for an ownership share, which in turn gave the FHFA regulating authority. This agreement between the GSEs, which stands for government-sponsored enterprises, and the U.S. government became known as the Preferred Stock Purchase Agreements (PSPs), which is intended to ensure the GSEs provide market stability, prevent market disruptions, and protect the interests of taxpayers.
While it is widely agreed among industry experts that previous amendments to the PSPAs have served the document’s stated purposes, it is equally widely agreed that the most recent changes made on January 14 do not. On the contrary, there is widespread concern that the new limits will actually cause the market instability and disruptions the PSPAs aim to prevent.
1. Caps on Vacation Homes and Investor Properties Are Well Below Recent Purchase Levels
The January 2021 PSPAs amendments capped the GSE’s purchases of second home and investor properties at 7% of total annual volume. Concernedly, this number is at the lower end of market averages since the conservatorship began. From 2008 to early 2021, second home and investment property mortgages have comprised 7-12% of loans originated. And, the number of borrowers in the market for second homes seems to only be rising. In fact, in February of 2021 second home mortgages were up 93% from the previous year, while primary residences were up only 32%.
What this increasing demand for second home and investment property mortgages suggests is that the 7% cap will cause unnecessary market disruptions and instability. Lenders who planned to sell this type of loan to Freddie Mac and Fannie Mae prior to the announcement scrambled to find new buyers for their loans, which has already caused unnecessary volatility in the market. Likewise, potential borrowers are finding interest rates on second homes are much higher than they anticipated. According to AmCap Home Loans President and CEO P. Garrett Clayton, many lenders are setting rates high as a precaution to avoid being caught out of tolerance.
2. Second Property Volume Caps Limit Financing Available to Under-Served Borrowers
While the caps placed on second home loans purchased by the GSEs are intended to free up loan volume for primary residence purchases, they actually may make it more difficult for borrowers interested in these homes to secure a loan. Historically, the GSEs have used more than $1 billion in annual profits from second homes to support first-time and under-served borrowers. If capital from second home loans is limited, so too will be the financing that was once used to bolster under-served markets. This, of course, is in direct contradiction to the PSPAs stated and intended purpose.
3. “Higher Risk” Loan Caps Will Serve Encumber Minorities and Low-Income Borrowers the Most
The January PSPAs’ updates also include a 6% volume cap on what is deemed “higher risk” loans purchased by the GSEs. Loans are determined to be high risk based on criteria such as borrower’s credit scores, debt-to-income ratios, and loan-to-values. Critics of the cap worry that the loan limitations will negatively impact minorities, low-income, and under-served borrowers immediately following the negative impact COVID-19 inflicted on the same populations. As with second home mortgages, the GSE’s inability to purchase more than 6% volume of “high risk” loans will likely increase interest rates, as lenders strive to keep intolerance and, in turn, a price many borrowers out of a primary home purchase.
Contact Your Senators and Representatives Today!
Concern over the repercussions of the new GSE caps continues to grow among industry leaders and organizations. The Mortgage Action Alliance, Mortgage Bankers Association, The Community of Home Lenders Association, and others have all released statements calling for the repeal of or changes to the recent PSPAs amendments. AmCap Home Loans stands with these organizations in its concern over the current terms of the PSPAs.
We urge you to contact your state Senators and Representatives to request they push for changes to the PSPAs. Specifically, ask your government officials to reach out to Janet Yellen of the U.S. Treasury and Mark Calabria of the FHFA and demand a re-evaluation of the GSE purchase caps and their implementation requirements.
The more our elected officials hear the fervent concern of our industry and their constituents, the more they will fight to ensure the conditions of the PSPAs serve the best interests of the market as well as individual borrowers.