• Louis Baca

February Market Update

INTEREST RATE SUBSIDIES CONTINUE Vice-Chairman of the Federal Reserve, Richard Clarida reported that the Fed will continue to provide economic stability to the market through 2021 by purchasing bonds, including mortgage-backed securities.

“My economic outlook is consistent with us keeping the current pace of purchases throughout the rest of this year,” he told the Council on Foreign Relations during a presentation Friday. As things stand, the Fed is buying at least $120 billion a month, split between a minimum $80 billion in Treasurys and $40 billion in mortgage-backed securities. The pace of purchases has accelerated through the Covid-19 pandemic as a continuing effort both to maintain economic growth and market

The Vice-Chairman stressed that he did not anticipate that the Fed would slow down this stimulus for “quite some time.” The Fed’s holdings are now more than $7 trillion.

In response to the FOMC’s Wednesday release, Mortgage Bankers Association Chief Economist Mike Fratantoni said economists are now asking whether a burst of inflation and a quick drop in the unemployment rate, will be sufficient enough to cause the Fed to at least begin thinking about slowing their asset purchases.

“The announcement of such a change in plans would impact market rates well in advance of the actual change,” Fratantoni said.

This announcement bodes well for homeowners, and prospective homebuyers, as long-term interested rates should stay at historic lows for the foreseeable future. GEORGIA RUNOFF ELECTION TO PUSH RATES HIGHER The Mortgage Bankers Association has predicted that now that the Democrats have won control of the Senate, after their victorious runoff election in Georgia, that the refinance boom may be coming to an end.

“MBA anticipates refinance originations to be strong in 2021, but slowing from 2020 to around $1.19 trillion,” Mortgage Bankers Association Chief Economist Mike Fratantoni said. “The prospects of increased spending and deficits will likely put upward pressure on mortgage rates as the year progresses, which in turn could lead to the current refinance wave ending a little sooner.”

“Regardless of which party takes over the Senate, the expectation is that there will eventually be another stimulus package to help households and businesses,” he wrote at the time. “Prior to the election, the possibility of a ‘Blue Wave,’ with Democrat control of the government, raised expectations that there would be much higher levels of government spending, larger budget deficits, and higher interest rates. That would certainly have cut off the refinance wave more quickly.”

With the Democrats in control of the House and Senate, it is anticipated that they will rapidly pass large stimulus bills that could cause an economic surge, which tends to bring about higher long-term rates (i.e. mortgage rates). As the economy improves, interest rates tend to rise. If the Democrats can successfully stimulate the economy, and not just for corporations and the upper class, will the Fed ease their bond purchases leading to rising interest rates? The Fed says no, but that will likely be predicated by the success of any stimulus bill(s). Too soon to tell.

FANNIE MAE COMMENTARY In Wednesday’s economic news, the FOMC made no changes to the current benchmark interest rate, leaving it in a range of 0-.25%. The central bank will maintain its current bond-buying program and will use all available tools to aid with the recovery of the United States economy. The Fed reiterated that the path of the economic recovery will be driven by the state of the virus and the pace of the vaccine rollout. This rate decision and statement were of no surprise, as the market was anticipating a dovish tone from the Fed. Powell says it’s likely to take “some time” before substantial progress is seen toward the Fed’s goals while the Fed views the pace of the economic recovery as “moderate”. – Fannie Mae BIG GOVERNMENT OR NOT The mortgage industry has largely been an experiment in socialization since the inception of Fannie Mae in 1938. After Fannie Mae and Freddie Mac fell under U.S. conservatorship in 2008, most of all home loans originated in the U.S. are government loans. Fannie, Freddie, FHA, VA, and USDA all under the thumb of the government. The U.S. government is ultimately on the hook for the U.S. mortgage industry as it ensures/guarantees the bulk of home loans originated.

Historically there has been very little controversy with FHA, VA, or USDA, which provide financing up to 100% loan to value, generally catering to borrowers with sub-par credit (not exclusively), or limited assets for a down payment. There have been few cries to unwind these government agencies, yet when these government loans default or fail, they have an implicit guarantee by the U.S. government to bail them out.

Up until 2008, Fannie and Freddie had an implied guarantee from the government, that if they were to fail, the government would bail them out; as it did during the Great Recession. In 2008, due to fear of economic collapse, if the GSEs were to fail, the government took Fannie and Freddie into conservatorship. This bailout came at a substantial cost to the taxpayer (the rub), which has since been paid back, multiple times over.

Somewhat unique to U.S. housing is the low rate 30-year mortgage. In 2020, 30-year fixed mortgage rates fell into the 2%s. Some lenders advertising 30-year fixed rates into the 1%s.

Why this is unique to the U.S., is that the entire U.S. mortgage industry is essentially socialized. There is no private competition. And the only reason that a private or government investor would purchase a 30-year fixed mortgage-backed security (MBS) at 2%, is because it is “insured” by the U.S. government. Lose that insurance, and you will lose that rate.

In the final days of the Trump administration, the U.S. Treasury attempted to fast track the end of a conservatorship of Fannie and Freddie. A goal for many in the Republican party since placed into conservatorship in 2008, to relieve the U.S. taxpayer from taking losses if the GSEs were to fail. Ironically, in 2020, the U.S. government bailed out the mortgage industry not once, but twice. Although, unlike 2008, what brought the mortgage industry to the brink of catastrophic meltdown in 2020, was not the result of high-risk lending, but bad government policies.

The rush to end the conservatorship of Fannie and Freddie has come to an end. The Biden administration is in no hurry to end conservatorship or privatize the GSEs. There are talks about merging the two GSEs, but it is unlikely that there will be any structural changes to the GSEs for the foreseeable future. Today, they continue to retain profits, expanding their balance sheets.

History has shown us that the U.S. government will bail out any entity that puts the entire U.S. and/or global economy at risk. Too big to fail. If Fannie and Freddie maintain a “government” guarantee, a necessity of low 30-year fixed mortgage rates, then they will likely always be too big to fail. There are serious talks about making the GSEs a utility or agency of the U.S. government. Those opposed to the big government would push back on such an idea, although they rarely complain about FHA, VA, or low long term interest rates.

There is an inherent conflict of interest for Fannie and Freddie, in their current, or pre-conservatorship state, to be publicly traded entities. To begin with, they have had an implied guarantee that the U.S. government will bail them out if they ever face a catastrophic economic event. Private companies do not have this benefit. The GSEs are also responsible for ensuring liquidity to the mortgage market while providing implied protections to the homeowner, but at the same time, being held accountable to the shareholders. Returning the highest stock price and the homeowners’ best interest can often be in conflict. Thus, government oversight.

No administration has been able to tackle the inherent issues of the GSEs. It is likely that the Biden administration will try. The question is whether the GSEs should be privatized or remain an agency of the U.S. government. Either way, the taxpayer will likely always have exposure if they continue to demand low long-term rates. FHA UPDATES COVID-19 FOREBEARANCE START DATE “Effective immediately, this ML extends through March 31, 2021, the deadline for single-family borrowers with FHA-insured mortgages to request an initial COVID-19 forbearance from their mortgage servicer to defer or reduce their mortgage payments for up to six months. If needed, this forbearance can be extended for an additional six months. This ML also extends the deadline to request the initial extension period for HECM borrowers impacted by the COVID-19 pandemic.” - HUD

NEW SECRETARY OF HUD ANNOUNCED President Joe Biden has chosen Rep Marcia Fudge from Ohio to be the next secretary of HUD. The announcement was welcomed with open arms by many housing trade groups. Marcia will replace Ben Carson, who was appointed by President Trump, and who had little to no experience in housing.

“On behalf of MBA, I congratulate Rep. Marcia Fudge on being selected to be nominated as the Secretary of HUD,” said Robert Broeksmit, Mortgage Bankers Association president and CEO. “While the housing market has been one of the few economic bright spots during the pandemic, HUD will play a central role in addressing a number of important challenges in the post-pandemic recovery, including how to resolve the mortgage forbearance afforded to more than 800,000 borrowers who have loans insured by FHA. Also, the new administration will tackle the ongoing housing affordability crisis affecting both homeowners and renters,” Broeksmit said.

“NAHB congratulates Rep. Fudge on her selection as HUD secretary,” NAHB Chairman Chuck Fowke said. “Upon her confirmation to the Cabinet post, NAHB looks forward to working with Secretary Fudge to enact a robust rental assistance program to help millions of renters and small business property owners who have been hurt by the COVID-19 pandemic. We also seek to work together to ensure qualified homebuyers have access to housing credit and to promote affordable homeownership and rental housing opportunities for all Americans.”

“As HUD secretary, Rep. Fudge will use her considerable intellect and energy to ensure that every American has a safe, secure place to call home,” said Mara Rudman, Center for American Progress executive vice president for policy. “For many years, Rep. Fudge has advocated for affordable housing and fought housing discrimination in rural and urban communities alike. Through her years as a mayor and congresswoman, she has shown a deep commitment to using federal policy to better communities and people’s lives.

“She is entering HUD at a particularly crucial time in its history,” Rudman said. “Millions of Americans are finding themselves on the verge of losing their homes due to the Trump administration’s and Senate’s unwillingness to pass eviction protections for those harmed by the COVID-19 crisis. She is also entering a department that, under its current secretary, has actively worked to increase housing discrimination by revoking the Affirmatively Furthering Fair Housing rule and by lowering its standards for proving racial discrimination housing by blunting its disparate impact rule. I have no doubt that as HUD secretary, Rep. Fudge will work tirelessly not only to address these immediate crises but also to address the long-standing structural issues that have left so many people without secure housing for so many years.”

“NFHA is extremely encouraged by President-elect Joseph R. Biden’s selection of Rep. Marcia L. Fudge to lead HUD,” NFHA President and CEO Lisa Rice said. “An unflagging advocate for civil rights, Fudge brings decades of experience as a public servant and a strong commitment to ensuring equitable access to credit, education, healthy food, clean environments, and other resources, which go hand-in-hand with access to housing. Having served as mayor of Warrensville Heights, Ohio, Fudge will bring a unique understanding of how HUD programs are implemented on the ground locally,” Rice said.

“Congresswoman Fudge would bring a much-needed fresh approach to national housing policy,” said David Dworkin, National Housing Conference president, and CEO. “She has been a strong supporter of the HOME program and played a leading role in getting Congress to approve desperately needed funds to stabilize the hardest hit neighborhoods during the Great Recession. Her background as mayor of an inner-ring suburb of Cleveland, Ohio, and as a leader on education policy, would be important as HUD plays an important role in reversing the catastrophic loss of Black homeowners over the past 10 years,” Dworkin said. Former HUD Secretary Ben Carson stated in 2019 that he would be departing after Trump’s first term. RATES DROP / DEBT RISES Mortgage debt hit a record high in the third quarter of 2020 at nearly $10 trillion, according to the Federal Reserve Bank of New York. Mortgage debt jumped $85 billion in the third quarter alone; prompted by interest rates hitting all-time lows 17 times in 2020. – REGULATORY FREEZE Out of the gate, President Biden announced a 60-day moratorium on any new regulations. It is not clear if there will be new regulation slated for the mortgage industry in the coming years, although it is anticipated that the current regulation in place may actually be enforced; as it largely has not been during the previous administration. HISTORIC TREASURY SECRETARY APPOINTMENT It is official, the US Senate has, in a unanimous vote, appointed Janet Yellen as the Treasury Secretary. For the first time in more than 230 years, a woman has led the department. “Economists don’t always agree, but I think there is a consensus now – without further action, we risk a longer, more painful recession now and long-term scarring of the economy later,” Yellen said prior to her Senate Finance Committee hearing. Yellen was appointed by President Obama as the head of the Federal Reserve from 2014-2018.

FHA BACKS DACA MORTGAGES AGAIN In a surprising last move from the Trump administration, HUD declared that the Federal Housing Administration will once again allow immigrants under the DACA program to qualify for FHA home loans.

“Earlier today and prior to 12:00 p.m., Secretary Carson and I posted a waiver and other documents to the HUD website that makes clear DACA status recipients are now eligible to apply for mortgages insured by the Federal Housing Administration,” former HUD Deputy Secretary Brian Montgomery said. “This notification marks the first time since DACA was established in 2012 that makes clear DACA status recipients are eligible to apply provided they meet other FHA requirements.”

Prior to today’s announcement, the FHA Single Family Housing Handbook included this statement: “Non-US citizens without lawful residency in the U.S. are not eligible for FHA-insured mortgages.” This language was incorporated into the FHA Handbook by the Obama Administration in September 2015 although it was first incorporated into FHA guidelines in 2003.

The problem, however, was that lawful residency pre-dated the creation of the DACA program, which created controversy on how the FHA should handle mortgages for DACA recipients. In 2019, HUD declared that the FHA would no longer back DACA mortgages after months of uncertainty.

“Determination of citizenship and immigration status is not the responsibility of HUD and the Department relies on other government agencies for this information,” then HUD Assistant Secretary for Congressional and Intergovernmental Relations Len Wolfson said in a letter to Rep. Pete Aguilar, D-Calif. “Accordingly, because DACA does not confer lawful status, DACA recipients remain ineligible for FHA loans.”

Then in 2020, former HUD Secretary Ben Carson walked back those remarks, saying no changes were made and that he would cooperate with an investigation to look into that rule. –

A victorious move for DACA recipients.

The Deferred Action for Childhood Arrivals (DACA) is a US immigration policy that allows children that have been brought into the US “illegally,” to be eligible for work permits and protection from deportation. Now, they also have access to the American Dream of homeownership. U.S. NATIONAL DEBT $27.84 Trillion and climbing.

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