Mortgage regulator redacts restrictions on certain loan programs
Earlier this week, the Federal Housing Finance Agency (FHFA) and the U.S. Department of Treasury announced they were suspending certain provisions in the controversial Preferred Stock Purchase Agreements (PSPAs). Earlier this year, the two regulators announced sweeping changes to the PSPAs in an effort to reduce taxpayer risk by placing restrictions on perceived riskier loans being purchased by Fannie Mae and Freddie Mac from mortgage lenders, both currently operating under federal conservatorship.
The revisions primarily focused on non-owner occupied loans, which include loans for investment properties and second/vacation home properties. The revisions mandated a 7% cap on agency purchases of non-owner occupied loans. Further, restrictions were also placed on loans containing so-called layered risk, which are loans containing more than one high-risk attribute like high loan-to-value ratio and low FICO scores. Both categories of loans famously performed poorly during the financial crisis.
Preferred Stock Purchase Agreements backstory
The purpose of the changes to the PSPAs was to reduce risk, optimize profitability and ultimately reintroduce Fannie Mae and Freddie Mac to the equity markets, taking them out of government conservatorship. This had been the primary goal for the agencies under the previous administration. Under the Biden administration, that mission changed beginning with the dismissal of the Trump-appointed head of the FHFA, Mark Calabria, earlier this year. For now, it appears Fannie and Freddie will refocus on home affordability and open up more products for consumers that can ultimately be wrapped with a government guarantee.
Many have argued that the provisions in the PSPA were too disruptive to the home finance market and that home affordability was suffering under the new lending rules. In response to the changes, lenders across the country raised interest rates on affected loan types to slow down production and manage the non-owner occupied and layered risk caps mandated by the regulators. Many lenders were forced to sell excess production to alternative lenders, often at undesirable terms, to manage existing production.
Effect on interest rates
With this week's announcement, we expect to see widespread change in interest rates for investment properties and second home mortgages. Don’t expect much change to layered risk loans, which were affected less under the new terms of the PSPA. While the terms of the PSPA were merely suspended, future changes to the PSPA and regulator oversight will be largely dictated by whomever is in office in Washington D.C.
These PSPA changes are effective immediately.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.
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