On Wednesday, September 16th, Federal Housing Finance Agency (FHFA) Director Mark Calabria testified before the House Financial Services Committee (HFSC) regarding his agency’s response to the COVID-19 pandemic. Of particular interest to committee members – as well as the mortgage industry at-large– was the recent decision to impose a controversial “adverse market” fee of on refinancings. The fee, 0.5% on refinanced mortgages, was announced on August 12th and had been initially scheduled to take effect on August 12th – only three weeks later. However, the rollout has since been delayed to December 1st after the move was met with significant backlash from the mortgage industry
In response to questions from members of both parties, Director Calabria defended the necessity of the fee in order for the GSEs to cover approximately $6 billion in projected losses associated with the COVID-19 pandemic, which the two companies are required to recoup by law per the charters under government conservatorship. According to Director Calabria, the imposition of a fee on refinancings was made at the behest of Fannie and Freddie, who allegedly told FHFA that unless they are allowed to increase their income, they are at risk of distress. As the regulator charged with ensuring the GSEs’ safety and soundness, as he told House lawmakers, “I have to take that seriously. I can’t simply ignore instability in the mortgage market.”
Questions and comments from committee members ranged from appreciation for FHFA, Fannie and Freddie’s motive for wanting to meet their obligations but concern with the process – particularly the timing – of rolling out the fee to concern about the financial impact to homeowners, for whom the fee could raise costs by an estimated $1,400 for the average consumer. However, as Director Calabria pointed out, “this fee amounts to about five basis points annually on the loan… That’s less than mortgage rates have been fluctuating during the time this hearing has been going on.” The fee was also lower than what Fannie and Freddie initially requested, and mortgage loans with a balance of less than $125,000 would be exempted from the additional cost.
Alternatively, Calabria suggested that in lieu of the adverse market fee, Congress could appropriate funds to the GSEs to cover losses associated with the pandemic, specifically citing forbearance policies mandated under the Coronavirus Aid, Relief and Economic Security (CARES) Act as an important contributor to their COVID-related costs. “Since this fee is resulting from costs that arise out of the CARES Act that are unfunded, of course Congress could fund that.” However, “it would have to be in the neighborhood of $10 billion that would make sure that we would not have to reassess any fees that would cover COVID costs.”
Ultimately, Wednesday’s hearing underscores the difficult choices that must be made at a time when the U.S. is facing one of the most costly crises in its history while Fannie Mae and Freddie Mac remain under government conservatorship and backing trillions of dollars’ worth of mortgage loans.
The debate regarding the adverse market fee and FHFA’s response to the COVID-19 pandemic thus far, specifically as it pertains to the foreclosure and eviction moratorium, reflected not only FHFA, the GSEs and Congress’ concerns regarding the long-term impact on the housing market but also those of the mortgage industry, including Oakleaf Group’s clients and peers.
Wednesday’s hearing provided insight into the current dynamics in the housing market and impact of COVID-19 on the mortgage industry, while highlighting the many questions still confronting policymakers and housing market participants alike, including:
– What happens after the foreclosure and eviction moratorium is supposed to end on December 31st?
– If the foreclosure and eviction moratorium for GSE-backed single family loans must be extended into 2021, will Congress appropriating $10 billion to the GSEs even remotely cover their COVID-related losses?
– Or is an “adverse market” fee inevitable as long as COVID-19 continues to ravage the U.S. economy, its cost, in terms of lives, livelihoods and to the mortgage industry continue to grow, and the GSEs’ remain legally required to meet their financial obligations as obligated by their charters and their responsibilities to the American taxpayer?
Wednesday’s hearing demonstrated one certainty regarding the state of the U.S. housing market that homeowners and the mortgage industry can count on for the foreseeable future: the uncertainty and economic turmoil wreaked by COVID-19 is unlikely to diminish anytime soon.
As mortgage market participants, including Oakleaf’s clients, work to manage the risks associated with this “new normal,” our economic consulting group is available to help tackle the various challenges facing the industry. If your risks have changed and you’d like to explore how you manage them differently, please contact us.
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