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Proposed Changes To Mortgage Rules

Director Mel Watt of the Federal Housing Finance Agency recently spoke at the North Carolina Banker’s Association’s American Mortgage Conference on September 9th. At this conference, Director Watt emphasized the changes affecting the mortgage rules that govern the Freddie Mac and Fannie Mae government-sponsored enterprises (GSEs) as well as the Federal Home Loan Banks.

These proposed mortgage rule changes can affect the cost of premiums, how insurance companies can become members of the Federal Loan Bank, membership oversight and introducing more liquidity into the financial home market. Requesting input and feedback from stakeholders, Director Watt hopes to propose positive changes that will help strengthen the mortgage industry while still making housing affordable for first-time homebuyers. Five changes that are currently being discussed:
Guarantee Fee Levels
The guarantee fees charged by Freddie Mac and Fannie Mae to lenders have caused a ripple effect throughout the housing financial market. It was decided back in December 2013 that these fees would raise up to 14 basis points for 30-year fixed mortgages to better account for mortgage loan risk. At the September conference, the FHFA suspended the fee increase to study what the effects have been to the mortgage market.

PMI Eligibility Requirements
Homebuyers without a 20% downpayment rely on private mortgage insurers (PMIs) to facilitate a higher loan balance. However, mortgage rules require PMIs who do business with Freddie Mac and Fannie Mae to meet certain statutory requirements, which could result in an increase in insurance premiums for borrowers. The NRA, MGIC and the Mortgage Bankers Association has voiced concerns and proposed changes to this requirement.

GSE Single Security Structure
The development of the Single Security Structure for Fannie Mae and Freddie Mac is to provide a more liquid market when it comes to mortgage-backed securities. It also seeks to eliminate the disparities between the two GSEs when trading in these securities. The FHFA also wants to change the Fannie Mae and Freddie Mac structure so the two securities are interchangeable.

GSE Affordable Housing Goals
The FHFA is looking for ways to increase the number of home purchases by low-income families through the GSEs. They are making changes to develop more affordable single-family home mortgages. The FHFA also wants GSEs to move into the rental market and provide affordable rental apartments on multi-family properties to low-income families.

Federal Home Loan Banks Membership Requirements
Many mortgage real estate investment trusts (REITs) use captive insurance companies to get access to funds from Federal Home Loan Banks sponsored by the government. The mortgage rules effectively closed this fund avenue as the FHFA seeks to change the definition of what an insurance company is in the housing market.

By clarifying this definition, it would prevent captive insurance companies from being eligible members in the Federal Home Loan Banks. There will also be a requirement that members demonstrate continued lending activity periodically as well as keep 1% of assets in the home mortgage loan market.

Whether the changes proposed by the FHFA will strengthen the lending market or cause premiums to rise will remain under debate. By using stakeholder feedback, the FHFA will analyze the market to determine the positive or negative impact these mortgage rule changes will create.

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