New UMB Security Fee Taking Effect as Regulators Begin Review of QM Rules
Written By: Joel Palmer, Op-Ed Writer
Recent regulatory issues and changes have drawn interest and concern from the mortgage industry.
Earlier this month, Fannie Mae and Freddie Mac announced a new upfront fee of 50 basis points on some government-backed enterprise securities. The fee is designed so that each enterprise can secure the collateral of the other enterprise in commingled securities, known as Supers and real estate mortgage conduit (REMIC) securities.
It was needed, according to the Federal Housing Finance Agency (FHFA), to accommodate the increased capital requirements in the recently finalized Enterprise Regulatory Capital Framework (ERCF).
The new fee is scheduled to take effect July 1.
The new fee quickly drew criticism. The Urban Institute, a nonprofit social and economic policy research firm, wrote that the new fee threatens the Fannie and Freddie single security, which the authors wrote was “one of the most effective reforms” made during the conservatorships of Fannie and Freddie.
Prior to the single security, investors preferred Fannie Mae securities over Freddie Mac’s. This made Fannie’s securities more liquid and more valuable. Freddie Mac, in turn, had to compensate lenders for the difference, which reduced its profits.
“Transitioning to a single security thus saved taxpayers hundreds of millions of dollars a year and helped pave the way for long-term reform,” the authors of this post wrote.
“Although the fee makes sense given the capital charge,” the continued, “it may pose some risk to the UMBS over the long term. By eliminating the fungibility of the GSEs’ commingled securities, investors may begin to pay more for Fannie Mae’s security, again forcing Freddie Mac to pay lenders a premium to make up for the weaker investor demand for their security.”
The authors concluded that the issue is the capital requirements in the ERCF, and that FHFA should suspend and reassess the capital provision.
SIFMA, a trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets, wrote a lengthy letter to FHFA outlining the same concerns.
“The imposition of a 50-basis point fee on Super transactions will effectively eliminate the ability of market participants to create commingled Supers, as it will be non-economic in nearly any conceivable scenario,” the letter stated.
Last week, FHFA Director Sandra L. Thompson, who was sworn in to a five-year term after serving as acting director, released a statement that the enterprises will continue with plans to implement the fee despite the concerns expressed since it was announced.
“FHFA remains committed to the continued strength and resilience of the Single Security Initiative (Initiative) given the significant improvement in liquidity and stability that this Initiative has afforded the TBA market. FHFA will continue to monitor the UMBS and TBA market to ensure UMBS and the related TBA market function as intended and will continue regular engagement with stakeholders.”
Rohit Chopra, director of the Consumer Finance Protection Agency, also caught the attention of the mortgage industry this past week.
In a blog post, Chopra said the agency is reviewing existing rules with the goal of simplifying what it believes are overly complicated rules. He also announced that the agency is focused on implementing directives from Congress that have been ignored up until now.
In addition, CFPB will conduct a review of several rules “that the agency inherited from other agencies…as well as other rulemakings the CFPB pursued in its first decade of existence.” Chopra wrote that, “many of these rules have now been tested in the marketplace for many years and are in need of a fresh look.”
One of the rules he specifically called out was CFPB’s Qualified Mortgage (QM) Rules. Chopra wrote that the bureau wants to “explore ways to spur streamlined modification and refinancing in the mortgage market, as well as assessing aspects of the ‘seasoning’ provisions.”
The current QM rules were issued in December 2020, near the end of the Trump administration. One rule replaced an existing requirement that a consumer’s debt-to-income ratio (DTI) not exceed 43 percent with a limit based on the loan’s pricing.
The second final created a new category for QMs called Seasoned QMs. These are for first-lien, fixed-rate covered transactions that have met certain performance requirements.
The bureau said it was revisiting the Seasoned QM Final Rule back in February 2021 when it proposed delaying the effective date of the QM rules due to the ongoing COVID-19 pandemic.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
