Shakeup at Freddie and Fannie: Update

How is that shakeup going so far? When we last checked in on things, new director William Pulte was slashing jobs at the Federal Housing Finance Agency. That’s the umbrella agency for Fannie Mae and Freddie Mac.

Additionally, Pulte claims to have saved millions of dollars by eliminating programs related to climate effects and diversity. 

Warning Calls? They’re Coming From Investment Managers

“You know, a lot of people say that these businesses are worth a certain amount”, Pulte has said. “I think they’re worth way more than what some people are saying.”

Indeed, calls from the administration to privatize Fannie Mae and Freddie Mac mean the stock prices of both enterprises have shot up. What shareholder wouldn’t love potential profits?

But the mortgage market could be the loser, warns a major investment management firm. We could all “face higher mortgage rates,” Pimco analysts have written.

And Pimco is not the only one. JPMorgan speculates that taking Fannie and Freddie out from under government oversight could wind up “worsening the current challenges in housing affordability.”

Pulte seems to acknowledge that it could keep people with modest incomes sidelined. He says:

An efficient and well-run Fannie and Freddie is a safe and sound mortgage market, and that includes making sure that we’re lending to people who can afford it.

But that’s a chicken-and-egg point. Many could afford it, with a boost at the beginning. That’s precisely why the Federal Housing Finance Agency has helpful programs that Pulte has been rolling back or discontinuing, like Fannie Mae’s popular HomeReady® First for modest-income loan applicants. And “cash-to-close” support from Freddie Mac has uplifted those with no money from their families to chip in.

In a Privatized Future, Consumers Would Shoulder More Risk

Loans backed by Fannie Mae and Freddie Mac make up 70% of home mortgages. If their operations are privatized, we’ll no longer have “government-backed loans” braced by federal guarantees. Maybe the worst risk is the possible infiltration of predatory lenders into the market.

Because the guardrails built by the government watchdog known as the Consumer Financial Protection Bureau are being taken down, consumers will have less protections if and when that happens.

So, how likely is privatization, and when could it happen? Ultimately, “that will be the boss’s decision,” Pulte says, indicating that the president will call the shots.

The National Association of Mortgage Underwriters (NAMU®) says privatization momentum is building.

NAMU notes that housing advocates believe privatization could cause mortgage interest rates to go up, possibly by something like 1%. Clearly, this will make it harder for people to apply for loans and acquire deeds. First-time buyers, and households of modest income, would have the most difficulty. Even access to the tried-and-true 30-year, fixed-rate loan would be at risk.

Wall Street hedge funds are OK with this. Many have been preparing to profit immensely from the looming change.

Still, it’s impossible to wave a magic wand and privatize Freddie and Fannie. Existing statutes require the government to jump through regulatory hoops. And politicians would presumably have to show their constituents that they oppose federal moves that would tank the chances of many ordinary people to buy homes. Some senators are pushing back in advance.

The Big Three Credit Bureaus: Under Review?

Anyone who needs a loan to acquire a deed learns how much influence a credit score has over an approval decision. So there’s a lot of concern over the news that Bill Pulte is performing a “full-scale review” of Experian, Equifax and TransUnion — the big three credit bureaus.

Pulte has also said the federal government wants to address the rising cost of a FICO credit pull.

The stock value of the credit reporting companies dropped after the news.

Fair Isaac Corp. (FICO) is the source of the commonly used credit score for mortgage applications. Pulte is critical of the related cost increases. This year, credit reporting costs are expected to jump 20% or more since last year. Fair Isaac says its charges make up a very small portion of a buyer’s costs.

Pulte says to expect scoring changes, too, away from the Classic FICO score. Fannie Mae and Freddie Mac will shift to the FICO 10T and VantageScore 4.0.

How much will the credit companies be overhauled down the road? How will this impact mortgage applicants? Will it be a net good, or more trouble than it’s worth?

We’re waiting to see how it all unfolds.

New Announcement: Crypto to Count for Mortgage Reserves

Pulte told Fannie and Freddie to “prepare their businesses to count cryptocurrency as an asset for a mortgage.” Industry experts have mixed responses to the idea of allowing crypto assets to be counted as borrowing power. The key concern is the tendency of many crypto assets to vary widely in value from one day to the next.

A recent sampling from Scotsman Guide shows us a few different reactions:

• Jim Parrott at The Urban Institute said the crypto announcement seems meant to support “the value of an asset class.” Parrott thinks that’s outside of the scope of what Fannie and Freddie do.  

• The Mortgage Bankers Association (MBA) welcomes the “effort to modernize the mortgage underwriting process” and thinks this effort needs to be broader.

• The mortgage automation company LoanLogics, noting the existence of tens of millions of U.S. crypto owners, believes the new policy could “expand access to homeownership for those with nontraditional income or assets.”

Now, Fannie and Freddie must write up proposals showing how they can count crypto assets — not converted into dollars — among an applicant’s reserves.

The applicant will need to be able to show cryptocurrency is held on a U.S.-regulated exchange, subject to applicable laws. The expected effect? Bitcoin owners will find it easier to buy homes, and won’t have to cash out their crypto accounts to do it.

Never a dull moment.