Capital requirement changes likely for mortgages

Changes in capital requirements for mortgages in portfolio and on servicing are very likely to come “in the not-too-distant future,” says Tim Roy, vice president of housing finance policy for the Independent Community Bankers of America..But another change that’s been talked about on and off for months, doesn’t appear to be on the near-term horizon, Roy notes. That’s privatization of the “GSEs,” referring to the secondary market agencies Fannie Mae and Freddie Mac. If and when it does happen, though, it could have significant consequences for community bank mortgage operations, says Matt Pieniazek, president and CEO of Darling Consulting Group, a Newburyport, Mass., firm that consults with community banks around the country. Uncertainty surrounding any change means banks aren’t making concrete plans, but for those with active mortgage operations, “it makes sense to at least think about” contingencies should it occur, says Pieniazek.An anchor of U.S. housing finance that arose out of the Great Depression of the last century, “Fannie” and “Freddie,” buy billions worth of mortgage loans from lenders annually, thereby infusing them with a fresh supply of funds to keep the mortgage pipelines open.In the wake of the Great Recession earlier this century, Fannie and Freddie were converted from shareholder-owned into federal conservatorship, due to the number of insolvent mortgages they held that went into foreclosure. Indeed, with the number of defaults among the loans made according to rules set by Fannie and Freddie, the agencies were blamed for loosening credit worthiness and other standards, contributing to the crisis.Trump administration officials have suggested that Fannie and Freddie should be returned to shareholder ownership. Although the “likelihood on when privatization will occur” is a guessing game, Pieniazek suggests.Shareholder ownership might usher in new conforming rules, notes Frank Farone, managing director at Darling Consulting Group. For instance, if Fannie and Freddie pull back from competitive purchasing on low and moderate-income loan programs, “it would change the dynamics of existing supply and demand, and that has a correlation to price—which means there could be a ripple of changes.” Higher pricing on FHA loans or PMI could result, for example. Or, if Fannie and Freddie change their rules on purchasing loans on vacation homes, investment property or newly constructed homes, that could have an impact on local housing markets or community banks that specialize in those niches.Besides that, there could be temporary disruption in secondary market operations when change does occur. Community banks with active mortgage operations benefit now from being members of their local Federal Home Loan Bank, since they provide funding, special loan programs and also purchase mortgages from banks. But that membership could become even more critical if secondary disruption occurs, Farone says. Also, consider bank and correspondent banks that purchase mortgages from community banks.All in all, it’s wait and see. But also “community bankers should be following this issue, and thinking of potential impacts,” Pieniazek advises.