Portfolio Strategy

January 22, 2021

By the Numbers

Picking the policy grapevine

Steven Abrahams, Brian Landy, CFA | January 22, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Between the new administrations’ push for a first-time homebuyer tax credit, concerns about FHA mortgage insurance premiums, changes at the Fannie Mae and Freddie Mac cash window, potential flattening of the LLPA grid and the derby for FHA Commissioner, the mortgage policy grapevine is ripe. A few thoughts on each piece of juicy fruit.

First-time homebuyer tax credit

Biden as candidate and now as president has pushed for a $15,000 first-time homebuyer tax credit to make housing more affordable. Since Democrats tend to line up readily behind affordable housing and Republicans tend to like tax credits rather than spending, the odds here look extremely high. There may be some wrangling over the details of the credit. The Biden platform describes it as a credit available when the loan closes, while a traditional tax credit would come when the homeowner files taxes. There also may be challenges for taxpayers who do not have a lot of taxable income, although the credit presumably would be used over several years. Some analysts have proposed a type of matched savings program in a dedicated homeownership account. Nevertheless, support from consumer advocates, homebuilders, realtors, originators and others are likely to get something through.

As for market implications: A first-time homebuyer credit should trigger a rise in home buying, a boost to home prices and more purchase originations, particularly in the lower tier of the housing market or in FHA/VA housing. Also, by raising home prices on existing higher LTV homes, this policy could lift the value of properties backing high LTV CRT securitizations.

Concerns about FHA mortgage insurance premiums

One of the first acts of the Trump administration was to cancel a 25 bp reduction in FHA mortgage insurance premiums scheduled by the Obama administration, and now that the vice president in the Obama administration has taken the top job, the possibility of a cut returns.  The FHA mortgage insurance fund is well capitalized at 6.1%, a level last seen before the 2008 financial crisis, so the fund presumably could absorb cuts. However, the Biden administration will likely move cautiously until it sees the fallout from current high levels of FHA forbearance and delinquency. Resolution of forbearance through partial claims will draw down the insurance fund, delinquencies that generate losses will draw down the fund, and cutting mortgage insurance premiums would also lead some borrowers paying higher premiums to refinance into lower premiums. A new FHA commissioner will likely wait until the second half of 2021 or early 2022 to see the outcome of forbearance before weighing the possibility of a premium cut.

As for market implications: a MIP cut would make all existing FHA loans more negatively convex and hit loans on the cusp of refinancing the hardest.

Changes at the Fannie Mae and Freddie Mac cash window

The Federal Housing Finance Agency announced amendments to the PSPA  recently that included a $1.5 billion limit on originator usage of a GSE cash window in any 52-week period. For any origination in excess of that limit, the lender will have to get a GSE guarantee and pool the loan.  The rule could force a lot of origination to get pooled away from the cash window, increasing the dispersion in pool prepayment speeds and eroding the quality of the cheapest-to-deliver TBA pools.

The policy intent of the new rule is unclear, and it is possibly it would hurt TBA pricing and raise the cost of mortgage debt, a consequence many policymakers might oppose. Lenders and investors will probably not start preparing for this rule until the Supreme Court rules this summer on whether the director of the FHFA can be removed at will by the president. If that is an option, the current FHFA director will likely go and the new director would very likely revise the PSPA amendments and rescind the rule.

As for market implications: none, until the status of the current FHFA director is settled.

Flattening the LLPA grid

Some analysts have highlighted the possibility over the next few years of flattening the grid of LLPAs now used by Fannie Mae and Freddie Mac. This would effectively lower the LLPAs now charged for riskier loans and raise the LLPAs charged for the safest loans. The impact would be to make mortgage debt more affordable for riskier borrowers and less affordable for safe borrowers, presumably on the assumption that safer borrowers can afford the higher cost. Fannie Mae and Freddie Mac guarantee fees have always embedded a subsidy of riskier loans by safer loans, and this would just rebalance the subsidy. There is nothing imminent on this front, but the idea has circulated in mortgage policy circles for a few years and the interest in affordable housing in Washington is high.

As for market implications: shifts in LLPAs always have implications for existing loans that would have the chance to refinance with either higher or lower fees. Speeds in loans facing higher fees would decline while speeds in loans facing lower fees would rise, all else equal. A flattening of the LLPA grid would also likely affect the market for private-label securitizations, where investors have seen agency-eligible loans backed by investor properties come to market. The economics of private-label securitization for these loans could shift.

The FHA commissioner derby

It is early, but some names have started circulating for the FHA commissioner job: Alanna McCargo and Julia Gordon, among others. The Biden administration just named McCargo a senior advisor to the incoming Secretary of Housing and Urban Development, which oversees FHA. McCargo has most recently been co-director of the Urban Institute’s Housing Finance Policy Center along with Laurie Goodman.  Julia Gordon currently is the president of the National Community Stabilization Trust

Steven Abrahams

1 (646) 776-7864

sabrahams@apsec.com

Brian Landy, CFA
1 (646) 776-7795
blandy@apsec.com

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