In this month’s update: Read about continued fall-out from the NAR settlement and how it’s affecting military veterans; increased interest in non-QM lending; Freddie Mac acquiring closed-end seconds; and how the FHFA and state banking regulators are now sharing information on mortgage banks.
Signs Point to Higher Rates for Longer
The Fed held its short-term Fed-fund rate steady at a range of 5.25% to 5.5% for a fifth straight meeting on April 17. Earlier in March, Fed Chair Jerome Powell emphasized during his semi-annual monetary policy testimony that “We want to see just a bit more evidence so that we can be confident.”
Wall Street analysts had expected mortgage rates to come down in 2024 with most penciling in three, quarter-point rate cuts before year-end.
First American Chief Economist Mark Fleming had this to say in the most recent First American Data & Analytics HPI report: “Persistent inflation has diminished any optimism that the Federal Reserve may start to cut rates in June, meaning mortgage rates seem more and more likely to remain ‘higher for longer’ this year.” The 30-year fixed-rate mortgage averaged 7.19% in the week ending April 18, up from 6.88% the previous week, according to Freddie Mac. A year ago, the average 30-year fixed rate was 6.39%.
CFPB and Closing “Junk” Fees
Federal regulators are taking a closer look at mortgage fees, with the Consumer Financial Protection Bureau (CFPB) focusing on three specific items: discount points, credit reports, and title fees - which it terms “junk fees.” In March, the CFPB issued a call for borrowers’ input on junk fees noting borrowers are paying more for closing costs. The mortgage industry disputes this notion, as it should.
“The fees mentioned are clearly disclosed to borrowers well before a home purchase on forms developed and prescribed by the Dodd-Frank Act and the CFPB itself,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. “The illogical use of the term ‘junk fee’ contradicts even the White House’s own definition, which cites the lack of disclosure of the fee being charged.”
Agencies Clarify Their Positions on Buyer’s Agent Commissions
Fannie Mae and Freddie Mac will not count buyer’s agent commissions as part of their allowable interested-party contributions (IPCs), according to announcements from the government-sponsored enterprises (GSEs) on April 15. In the policy clarifications on the National Association of Realtors (NAR) commission settlement, the GSEs noted that this guidance was not an update to their selling guides but a clarification on the treatment of seller-paid real estate agent fees.
“Interested party contributions permits interested parties (including property sellers) to make contributions to the borrower’s closing cost subject to maximum limits between 2% and 9% of the property value,” Fannie said.
Both Fannie and Freddie went on to say “Typical fees and/or closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to the IPC limits,” meaning the buyer’s agent commission will not be considered a seller concession for GSE loans. This follows as similar clarification from the Federal Housing Administration (FHA) a few months ago. Including agent commissions in the financing for most loans solves a big problem in the market. NAR and Community Home Lenders Association (CHLA) expressed support for the GSE’s announcement. “CHLA appreciates Fannie Mae’s clarification that seller payments of buyer realtor commissions will not be counted towards seller concession caps,” a spokesperson for CHLA wrote in an email. Stay tuned for updates on this hot industry topic.
Will NAR Settlement Hurt Veterans?
The recent NAR settlement may, however, disadvantage military veterans — as well as active-duty service members — who are trying to finance home purchases with Veterans Administration (VA) loans. The current VA rule states that a borrower using a VA loan cannot pay fees or commissions to a real estate agent unless determined “by the Under Secretary for Benefits as appropriate for inclusion … as proper local variances.”
NAR is urging the U.S. Department of Veteran Affairs (VA) to change an existing policy that bans veterans from paying broker commissions. This, NAR argues, puts veterans at a clear disadvantage compared to other mortgage borrowers. NAR President Kevin Sears recently sent a letter to John Bell, executive director of VA’s Loan Guaranty Service and in it, he states: “In situations where no offer of compensation is offered from a seller, VA buyers are immediately at a disadvantage, potentially forcing them to forego professional representation, lose a property in an already limited inventory, choose a different loan product, or exit the market entirely.”
The Community Home Lenders of America (CHLA) echoed the concerns in a letter sent to the VA in which they called on the VA to implement revisions to allow active-duty service members and veterans to fund buyer agent commissions when buying a home using the VA mortgage.
Private Label Securitization Market on the Rise
While the rest of the industry has been dealing with lower volume, private label securitization is having a pretty strong year, according to KBRA. About 15 months ago, a Barclay’s Credit Research report predicted that despite how bad 2022 was it would be better than the upcoming 2024. However, the shift in the interest rate environment in Q4 2023 actually helped drive activity in the alternative lending market because execution became an attractive option again. KBRA has even revised its Q1 issuance to $20 billion and expects its full-year private label volume to come in around $67 billion, up from its previous projection of $57 billion.
Given the higher risk with non-QM loans, we’re seeing an uptick for the First American Data & Analytics FraudGuard® solution with lenders requesting the product to ensure loan quality from the time of origination to closing. With FraudGuard, lenders can create and/or configure their current score set to support their non-QM submissions and ensure that alerts fire correctly in order to manage risk properly.
Freddie Mac Wants to Acquire Closed-End Second Mortgages
Federal Housing Finance Agency (FHFA) is looking for comments on a proposal that would allow Freddie Mac to purchase certain single-family closed-end second mortgages. The proposal, which was published in the Federal Register and is allowing comments until May 16, is designed to give existing borrowers more options when accessing equity in their primary residence, particularly if they have a rate originated from the low-rate environment of the Covid-19 pandemic.
“A traditional cash-out refinance today may pose a significant financial burden since it requires a refinance of the entire outstanding first loan balance at a new, and likely much higher, interest rate,” FHFA said in its proposal.
“Homeowners may also use second mortgages to access the equity in their home [where] only the smaller, second mortgage would be subject to the current market rate, as the original terms of the first would remain intact. In a closed-end second mortgage loan, the borrower’s funds are fully disbursed when the loan closes, the borrower repays over a set schedule, and the mortgage is recorded in a junior lien position in the land records,” FHFA stated. “Freddie Mac has indicated that the primary goal of this proposed new product is to provide borrowers with a lower cost alternative to a cash-out refinance in higher interest rate environments.”
The proposal is a welcome solution to increase affordability options given the current mortgage rate environment.
More Scrutiny for Independent Mortgage Banks (IMBs)
Earlier this month, the Conference of State Bank Supervisors (CSBS) and the FHFA agreed to enhance information sharing on nonbank mortgage companies. A memorandum of understanding (MOU) signed by both parties is intended to improve the ability to coordinate market developments, identify and mitigate risks, and increase protections for consumers, taxpayers, and the nation’s housing finance system.
Previously, state financial regulators primarily oversaw nonbank mortgage companies, while the FHFA regulated GSEs, including Fannie Mae and Freddie Mac, which served as important counterparties to the nonbank mortgage industry. CSBS Board Chair Lise Kruse emphasized the value of this new collaboration between state and federal regulators to support a stable mortgage marketplace, particularly given the distinct authority each supervisory agency maintained over the nonbank mortgage industry.
According to FHFA Director Sandra L. Thompson, the enhanced information-sharing protocols will improve the ability of both state and federal regulators to supervise the mortgage industry more effectively, leading to improved outcomes for all stakeholders.
About This Blog:
What We’re Watching is a monthly blog of industry news curated by Brian Haber, who monitors the mortgage market for First American Data & Analytics.