“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” – Winston Churchill.
Now that we’ve finally reached the day of taper, let’s go back to the original question at hand: is this the end of low interest rates as we know it? The short answer is ‘no’. I take it as a big positive that the 30yr Treasury is below 4%, currently at 3.85%. However with the Fed removing its hold on the interest rate market we should expect some volatility.
The big news this week was that exiting FHFA Acting Director Ed Demarco ordered both Fannie and Freddie to increase their guarantee fees and other credit costs for all loans. He suggested the increases will encourage further return of private capital and gradually reduce Fannie and Freddie’s footprint in housing. The change will increase borrowers interest rates between 25 and 50bps in RATE. The MBA, NAFCU and other trade associations all sent letters to the FHFA urging them to not increase the housing costs on borrowers, especially in tandem with new compliance regulation that will exclude certain borrowers from getting financing that rolls out in January. The Fannie and Freddie changes are effective for loans being delivered in April which means the new fees will find themselves on rate sheets in February. This change impacts all borrowers, even those with 800+ credit scores and LTV’s less than 60%.
Let’s put aside the outrageousness of such a change and at such a critical juncture and look at the facts.
1. The Fed is unwinding its support of long term rates
2. Fannie and Freddie credit charges are going up materially
3. Fannie and Freddie are reporting record profit
4. Home sales are slowing
5. Implementation of QM next month will eliminate many borrowers from financing, especially purchasing homes
6. Economy is improving at a slightly moderate pace
7. Inflation is below a comfortable rate
8. The non-agency whole loan market (private capital) has little to no traction and there is less liquidity now than in January of 2013. Despite record Fannie and Freddie profit, investors are unwilling to re-enter the market.
9. The Big Banks are increasing their market share
10. Homeowners helped during the recession where those whose loan was guaranteed by Fannie and Freddie
11. Homeowners least helped during the recession where those whose loan was held by private institutions
12. With upcoming credit cost change by Fannie and Freddie, approximately 100bps of a borrowers rate will go directly to the GSE’s
Let me repeat that last one, if a borrowers rate was 4.50%. 3.25% will go the owner of the loan, 0.25% will go the servicer and 1.00% will go to Fannie and Freddie. In 2003, about 0.10% to 0.15% went to Fannie and Freddie. Hard to argue that credit costs for loans originated today should be 10 times higher than what they were a decade ago. The origination quality is more than double today what it was in 2003. Delinquencies and defaults for loans originated over the past 4 years are at record lows. So is this really about encouraging private capital, is this pure extortion or is this a game of chicken to see if the US housing market can survive without Fannie and Freddie? I believe it’s a combination of all three depending upon who you talk to.
2014 shapes up to be a truly interesting year and one in which many changes are likely to unfold. Headwinds in the face of a recovery have only increased and the realization of GSE pricing changes, potential reductions to GSE loan limits, compliance changes and stimulus changes will all materialize in 2014. There is speculation that Mel Watt, the new FHFA director will undo DeMarco’s last act on the Fannie/Freddie pricing change. There will likely be more debate about the future of the GSE’s and the push to unwind them as several of our representatives in DC have suggested.
Unwinding Fannie and Freddie? I still struggle with the notion that our politicians will voluntarily give that kind of power (and money) to Wall Street, hedge funds and the big banks. In my lifetime I have not witnessed our government giving away both power and money of this magnitude. I believe the system, albeit seriously flawed years ago, worked, and placing Fannie and Freddie into conservatorship was a necessary step during very unusual times. What’s to save the economy during the next housing crisis if there isn’t a way for the government to intervene? With all of the pricing changes, compliance changes, regulations, etc. haven’t we already ensured we’ve fixed the evils of the past?
I’d prefer my last market update for the year to end on a more pleasant note. But, as mortgage bankers know, this is a counter-cyclical business. What’s bad for the economy is generally good for interest rates. We are a bittersweet group. I expect 2014 to be bumpy but the we’ve also moved passed the biggest bump, which was the increase to interest rates that came in the middle of 2013. If you had asked anyone at the beginning of 2013 what a 100bps increase to interest rates would do to the market, the answer would most likely have been ‘disaster’. The year ended certainly better than that and I expect 2014 to end much better than expectations. Keep a close eye on jobs, inflation and GDP. They are the true markers of economic reality.
Happy Holidays and Good Luck in 2014.
