Posts tagged ‘GSE patch’

Treasury Releases its Post-GSE Blueprint and Why it Matters

Yesterday, the Treasury Department unveiled its long-awaited vision of a post-GSE housing market. Here are my initial takeaways:

  • RIP to “the Patch.” As I explained in previous blogs, Dodd Frank authorized mortgages eligible for sale to Fannie or Freddie to be classified as “Qualified Mortgages.” This is an important designation, as it provides mortgage holders a presumption that the borrower had the ability to repay a mortgage loan should it have to be foreclosed on. To the surprise of no one, the report recommends that this important exception for the GSE expire. The CFPB is already preparing for a post-Patch world. The Patch is set to die in July 2021.
  • Fannie and Freddie would become recapitalized entities, no longer having a government charter with the implicit backing of the U.S. Treasury. In addition, the Treasury recommends that Congress encourage the creation of competitors to the GSEs. To ease the barrier of entry into the industry, it suggests that Fannie and Freddie would have to make some of their proprietary information available to the public. This idea intrigues me as I think it’s an approach that should be used in many other big data contexts, but that’s a blog for another day.
  • One of the primary concerns of credit unions and community banks is that a world without Fannie or Freddie would be a world in which they could not cost-effectively and competitively sell mortgages. The big guys with their volume will always be able to undercut smaller institutions. To address this issue, the Treasury recommends that the new GSE-like institutions be required to purchase mortgages for cash and give the seller the option of whether or not to sell their servicing rights. The buyers would also be prohibited from offering volume discounts.

What does all of this mean? Realistically, there is no way that serious housing reform will be undertaken before the November 2020 election. That being said, the demise of the Patch gives whoever is in power real leverage to get Congress talking following the election. Translation: expect housing reform to be the top issue following the next election and at least some of these ideas to gain traction.

On that note, enjoy your first weekend of football. Let’s hope for real lousy weather on Sunday so that those of us committed to forgoing any physical movement or interaction with the family for approximately the next 22 Sundays don’t have to feel too guilty.

September 6, 2019 at 8:54 am Leave a comment

Clock Is Running On The GSE Patch

One of my favorite Assemblymen when I worked in  the assembly was a curmudgeonly fiscal hawk from Long Island who once explained to me that in politics, if you think more than six months ahead you are a visionary. This quote came to mind this morning as I was reading this article from the American Banker explaining why the clock is now ticking for GSE reform whether Congress wants it to or not.

First, let’s take a trip down memory lane back to the regulatory dentist chair that was Dodd-Frank for so many compliance people and legal eagles. Remember that under Dodd-Frank, qualified mortgages are given “safe harbor” protection against claims that a consumer did not have the ability to repay a mortgage loan they were given. The CFPB regulations and congressional statute created maximum debt to income ratios for mortgage loans to qualify as QM mortgages, Congress also said that any loan which that qualify for sale to Fannie, Freddie and other GSE’s would also qualify as QM mortgages.

Fannie and Freddie have taken full advantage of this flexibility. As of December 2018  loans with debt-to-income ratios as high as 50% which meet certain other criteria qualify as QM mortgages. In contrast, under the CFPB’s promulgated regulations, the maximum debt to income ratio is 43%. (See 1026.43)

This is a big deal. Research highlighted by the American Banker indicates that in 2018 29% of loans purchased by Fannie Mae, 24.9% of loans purchased by Freddie Mac and a whopping 55.3% of FHA loans had debt to income ratios above the 43% ceiling.

Which brings us to why the clock is ticking. Dodd-Frank gave Congress eight years to restructure the existing GSE framework. If it does not accomplish this, effective January 10, 2021, the GSE’s turn back into a pumpkin and no longer have the authority to issue loans with D-T-I’s in excess of the general Dodd-Frank caps. Something tells me we’re about to see the start of a giant game of chicken with each side trying to exact desired housing reforms in return for extending the GSE loophole. Unfortunately, as the uncertainty over the exception grows, so to will its potential impact on the mortgage market. Stay tuned.

February 5, 2019 at 9:35 am 1 comment

Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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