Morning Report: Mark Calabria addresses Fan and Fred changes

Vital Statistics:

S&P futures4,120-6.8
Oil (WTI)61.25-1.37
10 year government bond yield 1.57%
30 year fixed rate mortgage 3.18%

Stocks are lower this morning as overseas cases of COVID-19 increase. Bonds and MBS are up small.

Mortgage applications finally snapped out of their slump and increased for the first time in 6 weeks. Overall applications increased 6.8%, while purchases increased 6% and refis rose 10%.

FHFA Chairman Mark Calabria spoke at the MBA Spring Conference and said that the Preferred Stock Purchase Agreement (the basic governing doc between the GSEs and the government) will need to be amended again.

“I said in January when the PSPA were signed — there needs to be another set of amendments. January really is a bridge,” he told Wells Fargo‘s Kristy Fercho, chair-elect of the Mortgage Bankers Association, at the trade group’s spring conference. “We knew when the January memo was being signed that Fannie would hit the retained earning caps and the sweep would go into place. And so it was absolutely critical that we ended this sweep so we can continue to build capital. Because again, just as it is at Wells or any other financial institution, with Fannie and Freddie, capital really is the binding constraint on the risk and footprint and activities they can take.”

Calabria was asked about the 7% investment cap as well. Here is what he said:

“I obviously wish that we were in a better capital position and had a stronger Fannie and Freddie that could support more of the market, and that’s our objective” Calabria replied. “The reality is there will be some short-run pinch, if you will, on the market, while we try to build a stronger Fannie and Freddie that can support the market. I do want to clarify because I think there’s often some misperceptions out there, and to say, the PSPA are lines of credit, Fannie and Freddie cannot legally knowingly take risk against PSPAs. That would be like if Wells said, ‘Well, we’ve got deposit insurance so who cares.’”

I found this statement surprising since the NOO loans are highly profitable for Fannie Mae and Freddie Mac, so limiting them does nothing to improve their capital position. As Calabria mentioned, the PSPA is a line of credit, and this would be the first time I have seen a creditor unilaterally change a debt covenant in a way that is adverse to the creditor. It is possible he is referring strictly to the high risk stuff (i.e. high LTV / low FICO / >43 DTI) and not the investment properties, but the question was specifically about the 7% cap. But certainly, if the overarching goal here is to get Fannie Mae and Freddie Mac better capitalized, limiting investment property loans goes against that goal.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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