|10 year government bond yield||1.51%|
|30 year fixed rate mortgage||3.19%|
Stocks are higher this morning as bonds continue to rally.
Fannie Mae sent out a letter yesterday announcing they will restrict non owner occupied guarantees to 7%. This applies to cash window sales and MBS as of April 1. I am not sure how Fannie plans to enforce this, but it will be something to watch.
This rule change stems from an order to FHFA in the waning days of the Trump Administration, which intended to limit Fannie Mae’s risk. In addition to the 7% NOO cap, it directs Fannie to limit cash window purchases to $1.5 billion per year per lender, and also to limit its high risk loans (generally LTV > 90 / FICO < 680 / DTI > 45). The latter requirement seems to be a direct shot at the HomeReady program.
The original letter gave a Jan 1 2022 date for implementation, however Fannie is interpreting the investment / second home cap as being binding now, hence the short fuse (March 10 announcement, April 1 start). The MBA is gathering input from lenders regarding the changes, and it appears that Fannie is as well. Note the Urban Institute has already issued a white paper that lists the problems with the FHFA directive.
While Urban Institute is mainly concerned with the high risk loan issue since it disproportionately affects minority borrowers, it does also push back against the investment limit. Why does Urban Institute care about landlords? It doesn’t. But, investment property loans are highly profitable for Fan and Fred, and these loans subsidize those higher risk loans that Urban wants to see made.
So, what does this mean for originators? First understand that these edicts stem from a different Administration. The Biden Admin is more sympathetic to Urban Institute’s worldview than the Trump Admin is. Janet Yellen could write a letter to FHFA rescinding the January guidance. FHFA would then tell Fannie and Fred that the limits no longer apply, and it will be business as usual.
Second, given that investment property loans are highly profitable, at least according to Urban’s numbers, someone is going to do them. The most likely outlet is probably non-QM. Interestingly this could alleviate a big issue with non-QM, which was the track record problem. The buy-side has been leery of non-QM securities because they don’t have a history of prepay speeds and delinquencies, which makes valuing them difficult. Introducing garden-variety investment properties into the mix would fix that because there is a ton of data on these loans. That said, the buy-side was not avoiding this paper for that reason only; there are other issues that need to get ironed out at the SIFMA level.
The other likely outcome is that this could jump start the private label securitization market again, and we could see banks begin to bid this paper given its profitability characteristics. On the high-risk loan issue, I imagine FHA will pick up the slack.
My guess is that the Biden Admin will not want to upset the apple cart with the economy in a precarious position and the US suffering a housing shortage. Limiting investment loans will only exacerbate that problem. The issue near-term is that COVID and the stimulus bill are front and center for DC’s attention. That said, since it doesn’t require legislation it does make things easier. Plus nobody in Blue Check Mark Twitter or the New York Times is going to get too bent out of shape if Biden reverses some Trump directive. That makes it easier.
Yesterday’s 10 year bond auction went off without a hitch, which was pretty impressive given that bonds were already up pretty big on the day. The bid-to-cover ratio was up a hair. We have a 30 year bond auction today at 1:00 pm, which will be watched closely.
Initial Jobless Claims fell to 712,000 which is still a dismal number. While everyone loves to focus on the 379,000 print in February, the constant drip of 700,000 + initial jobless claims is a big issue. We used to be around 200,000 pre-COVID, which puts that number into perspective.