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Last updated on October 3rd, 2023 at 01:35 am
Fannie Mae and Freddie Mac released their Q3 earnings last week, reflecting a combined $6.7 billion in net income, up significantly from the previous quarter.
This strong performance was not unexpected, but makes the upcoming 50 basis point adverse market refinance fee more questionable.
Fannie produced $7.2 billion in consolidated net income YTD.
And while they certainly are key to providing enormous liquidity to the nation’s housing system, they would have never achieved the results without the help of the Federal Reserve and the MBS.
The government’s response to the COVID-19 pandemic drove rates low, increasing the consumer demand and the GSEs now benefit by being able to execute through any private capital option because of their exclusivity of the guaranty.
So the question everyone has is, why are these two companies then introducing a new adverse market refinance fee?
This quarter was filled with rate and term refinances and cash-out loans, the total refinance book is running approximately two thirds of total new production.
Fannie’s stated in 1 Q, “If refinances continue to be a large proportion of our acquisitions in 2021, we expect our average charged guaranty fee on new single-family conventional acquisitions to increase in 2021 as a result of the new adverse market refinance fee we plan to implement on December 1, 2020.”
And they add, “For every $1 billion in eligible refinance loans we acquire, we will collect $5 million in adverse market refinance fees, which will be amortized into net interest income over the contractual life of the loans as a cost basis adjustment.”
Some experts argue that FHFA director Mark Calabria saw an opportunity to build capital more quickly to achieve his stated goal of releasing the two companies from conservatorship.
They are, in essence, arbitraging the work of other federal agencies to stem the impact of COVID-19 on the economy and using this as an opportunity to skim profits as opposed to supporting the housing sector.
The Federal Reserve of New York looked at refinanced GSE loans on default risk and their conclusion, after a lengthy fact-based analysis was simple, “we find that lowering monthly mortgage payments by refinancing decreases the likelihood of default on mortgages as well as other debts substantially.”
The GSEs get to see refreshed income, FICO, and asset data, to reduce the risk of refinancing the borrower.
In short, they are getting the best credit quality borrowers in the mortgage market with confirmed fresh credit data.
In addition, whether through an AVM and subsequent PIW (property inspection waiver) or a full appraisal, they are getting the benefit of resetting the new LTV to reduce the event of default.
The New York Fed study showed that it didn’t take much of a payment reduction to improve default risk.
The GSEs are driving billions of volume into new MBS that are the best of credit quality borrowers amid a pandemic.
If during the global crisis this is the way they are filling their kitty would it be a good idea to turning these companies back into privately held mega-firms with their goals for returns exceed the responsibility of their own charters, instead of helping facilitate savings to be put in the hands of the consumer, they are skimming massive incremental revenue starting Dec. 1st into their coffers off the refinance business?
Reference Source: Housing Wire
