Biden Attacks Low-Income Home Owners
While the Biden Administration is defying the U.S. Supreme Court to forgive government guaranteed student loans, officials of Ginnie Mae and the Federal Housing Finance Agency are sanctioning lenders for refinancing residential mortgage loans for low income families. President Biden says that he wants to help Americans struggling with inflation, but he really wants love from Black Rock, PIMCO and Bank of China.
For many years, a war has raged between lenders and issuers of mortgage backed securities (MBS), on the one hand, and buyers of these securities among the largest global financial institutions. We talked about the politics of prepayments in a NMN column in 2019 as the Fed was forcing interest rates down to zero. But now, strangely, the Biden Administration is escalating the attack on consumers in an election year.
On April 3, 2024, Ginnie Mae posted a “reminder” to issuers about monitoring prepayment activity, a requirement that was actually added to the Ginnie Mae Guide in 2017. “Ginnie Mae has observed increased prepayment activity in some elements of its program,” reads the threatening notice from Ginnie Mae President Alanna McCargo.
“Ginnie Mae reminds Issuers that it continues to monitor prepay activity and performance, and violations of requirements will be proactively addressed with Issuers. This could include warranted sanctions as permitted by the MBS Guide and the relevant Guaranty Agreements.”
McCargo’s warning is in direct opposition to the initiatives advanced by the Biden Administration to support housing. The consumer is being deliberately discriminated against by officials of the Biden Administration in favor of big global bond investors? Really? When you penalize a mortgage lender, you are effectively penalizing the consumer, who will pay via a higher cost loan.
“President Joe Biden and Vice President Kamala Harris believe everyone deserves to live in a safe and affordable home,” notes the White House statement on housing dated March 11, 2024. “Whether you rent or own, having a place to live that you can afford in a neighborhood with opportunities is the foundation for so much else in life.”
The fact that the Biden Administration and various trade groups representing large global investors chose this time to pressure the FHFA and Ginnie Mae to sanction lenders with “high” levels of prepayments is outrageous. But through several administrations of different political parties, officials at HUD and the FHFA have been working against the interests of consumers for years.
In APM 17-06, then Ginnie Mae President Michael Bright formally required issuers to avoid making refinance loans to consumers under threat of sanctions. Bright extended the restrictive 2016 pooling restrictions put in place under Ginnie Mae President Ted Tozer and added “additional measures… to protect security performance.” This is Orwellian NewSpeak for denying consumers their legal right to refinance a mortgage.
Bright has been a vociferous critic of government lenders who help low-income consumers refinance home mortgages, especially VA insured mortgages for men and women in uniform. VA loans are actually a benefit for veterans, something we owe to them because they serve. But big global investors in Asia and the Middle East don’t care about American men and women in uniform.
When Bright left Ginnie Mae in 2019, he passed through the magical Washington revolving door to become CEO of the Structured Finance Association (SFA), the largest trade group representing MBS investors. The sad part is that any advantage to bond investors gained by sanctioning mortgage lenders is nominal, but the impact on any given consumer could total into hundreds of dollars a month.
American home owners have the legal and contractual right to prepay a residential mortgage at any time and without penalty. Indeed, the American system of mortgage finance allows issuers of MBS to sell securities backed by loans that are already in the money for refinance. Is this a great country or what?
When officials of the Biden Administration at the FHFA, Ginnie Mae and HUD attack lenders with “high” refinance volumes, who are they serving? They are not servicing American consumers. It’s almost as if the folks at the FHFA and Ginnie Mae worked for PIMCO, Black Rock and other large investors in MBS rather than the US government.
Most MBS are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae in order to promote home ownership. Yet even with annual prepayment rates at 30-year lows, large institutional investors and banks complain bitterly to officials at Ginnie Mae and the FHFA every time an American consumer exercises their legal right to refinance their home.
Over the years, the FHFA and Ginnie Mae have put in place many seasoning rules and other requirements designed by lobbyists for bond investors that are designed to thwart consumers from refinancing their mortgages. The latest threats of sanctions against mortgage lenders is merely an escalation of a longer war between consumers and the biggest global investors.
“Agency MBS prepayment speeds stayed slow in March, including 6 CPR for the cohort below a 4% note rate, and still between 7-12 CPR for the >5.5% coupon UMBS,” writes Eric Hagen of BTIG. “We see higher prepayment risk in the new originations which look more likely to get refi'd away quickly if rates fall even marginally.” Note that fewer than one in ten mortgages is even remotely in-the-money for refinance.
Understand that the folks that work at Black Rock and PIMCO and the Bank of Japan and the Bank of China understand that MBS are callable securities. They understand that the US homeowner holds a free put option which gives them the right to refinance every month. But officials of the Biden Administration attack the ability of homeowners to take advantage of lower interest rates. How is this helpful to consumers?
Many servicers don’t even bother to make the call to consumers who could save money for fear of being sanctioned. Keep in mind that many (but not all) servicers are happy to simply keep the loan in the servicing portfolio. Calling a borrower to save them a couple of hundred dollars a month in mortgage interest payments is discouraged because the lender will initially lose money on the new loan.
This situation is even more unfortunate when we look at criticism by industry lobbyists and officials in the Biden Administration of high rates of refinance for loans guaranteed by the Veterans Administration. For men and women in uniform, a VA mortgage is a benefit, not a government guarantee program like the FHA. When the Biden Administration takes steps to deprive veterans of access to credit to protect big global investors, this is a situation that demands public attention.
The absurd part of all of this is that fewer than 1-10 mortgages are even in the money for refinance, yet the drumbeat against prepayments continues from big investors and the SFA. Strangely, the FHFA has recently been most aggressive with conventional lenders, imposing stiff penalties on pools presented to the cash window by issuers deemed to have “excessive” levels of refinance transactions..
Historically it has been in the VA sector, where streamline refi options are readily available, that the most criticism of lenders has been heard. In a streamline VA refinance, the borrower can roll their closing costs into the balance of the new loan. This stands in contrast to FHA loans where a streamline refinance option is also available, but the borrower must pay closing costs other than the guarantee fee up front.
Instead of encouraging lenders to refinance consumers aggressively before interest rates move higher, Ginnie Mae and the FHFA are slamming the door on the fingers of consumers who are desperate to reduce the cost of living. With the Biden Administration and consumer housing costs, watch they do and for whom, not what they say.