Mortgage – HousingWire

Fed pulling back from the MBS market cautiously

Posted: 07 Dec 2021 03:00 AM PST

The Federal Reserve Bank of New York later this week plans to sell up to $90 million in agency mortgage-backed securities (MBS) now held in portfolio, a small sale, but still an interesting move in the current economic climate.

The MBS asset sale is not indicative of a change in monetary policy on the part of the Federal Reserve, the announcement of the sale states. Instead, the New York Fed said it undertakes these smaller MBS transactions from time to time to test its "operational readiness" to implement "existing and potential policy directives" from the Federal Open Market Committee (FOMC).

"[The] agency MBS small-value exercises … are conducted from time to time as a matter of prudent advance planning by the Federal Reserve," the New York Federal Reserve Bank said in announcing the MBS sale slated for Dec. 9. "The exercises are conducted under the annual authorization for domestic open-market operations for the purpose of testing operational readiness.

"They do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

Although market observers who spoke with HousingWire agree that the Fed is not at this time considering selling off any of the $2.6 trillion in agency MBS held in its portfolio, there is a move afoot to reduce at a faster pace new bond purchases, called tapering. That would create the space for the Federal Reserve to later raise its benchmark interest rate sooner as well, a move that could be implemented by mid-year in 2022, according to some market watchers.

"The most likely path to tapering is to slow purchases of securities, thus reducing the growth in the amount of money in circulation," said Ray Perryman, president and CEO of The Perryman Group, an economic research and analysis firm based in Texas.

Raising the benchmark interest rate would be a major step, if taken, and may be necessary next year to take some steam off of the economy and combat rising inflation, which in October shot past 6% on an annualized basis, the highest level in three decades. Perryman says rates may rise modestly over time as the Fed works to stem inflation, but he doesn't see any major rate increases for the foreseeable future.

"Given the volumes of recent monetary policy, there’s ample room for tapering without notable market effects," he explained. "While some observers are trying to cast this period like the double-digit inflation days of the late 1970s and early 1980s, it is not remotely similar.

"At that time, we had pretty much institutionalized inflation (many will recall that simple savings accounts paid 5.25% annual interest). Nothing even close to that is happening now."

Still, today's inflationary pressure — a byproduct of necessary pandemic deficit spending and related supply-chain bottlenecks, to a large degree, according to Perryman — is prompting the Fed to now consider picking up the pace of its bond tapering.

"At this point, the economy is very strong, and inflationary pressures are high," Federal Reserve Chair Jerome Powell said in recent testimony before the Senate Committee on Banking, Housing and Urban Affairs. "It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner."

A decision on increasing the pace of tapering is expected to be made at the upcoming FOMC meeting, scheduled for December 14-15. Several other Federal Reserve members have echoed Powell's comments and expressed support for speeding up the tapering process.

Laurie Goodman, vice president of housing finance policy and the founder of the Housing Finance Policy Center at the Urban Institute, expects even an accelerated tapering plan will have only a "minimal effect" on interest rates because "the market expects it." Another factor to consider is that the Fed plan involves reducing only new bond purchases — both Treasury securities and MBS — and does not affect its purchases to replace bonds that mature each month, which is a significant number.

Prior to beginning the tapering strategy in November, the Fed was purchasing $80 billion in Treasury securities and $40 billion worth of MBS each month. The current tapering plan calls for reducing purchase of Treasury securities by $10 billion a month and new MBS asset purchases by $5 billion monthly — which would take new purchases of each to zero by mid-year 2022.

But even with the tapering underway, the Fed remains a major buyer in the market because it continues to replace maturing securities, called "run-off." This past September, for example, according to the Urban League, the Fed's agency MBS purchases totaled $102.3 billion — of which only $40 billion was new purchases.

Goodman said she expects the Fed will move forward with a plan to increase the velocity of its tapering. "I think they will taper $15 billion to $20 billion a month in Treasury securities and $7.5 billion to $10 billion [a month] for MBS," Goodman said.

Even with an accelerated tapering schedule, however, the Fed still has plenty of firepower left in its monetary tool chest with respect to asset purchases or sales, including the ability to reduce the pace of its run-off replacement and, ultimately, the ability to begin selling off assets in its portfolio. The New York Fed's small-value agency MBS asset sale slated for this week is proof of that "operational readiness."

"The Fed will first taper its new bond purchases," Goodman said. "When they have tapered to zero, they will take the time to assess whether they need to do more. At that point, tapering replacement purchases [run-off] will be on the table."

As far as the further step of selling off a significant volume of its Treasury or MBS assets, Perryman said that is not likely to happen anytime soon.

"I don’t believe there will be sales of the Fed’s portfolio on the open market for the foreseeable future," he said. "Direct interest moves [raising the benchmark interest rate] will likely come somewhat later."

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Who’s afraid of the PSPA?

Posted: 06 Dec 2021 03:00 AM PST

Stakeholders are divided over whether, in light of proposed changes to its capital rule, the Federal Housing Finance Agency should retool its agreement with the U.S. Treasury and remove policies some say never belonged there in the first place.

Even if the mortgage industry were in agreement, there is little they could do about it. Whether to open up that document — the Preferred Stock Purchase Agreement — is at the sole discretion of the two parties that negotiate it, the FHFA and the Treasury.

There are no restrictions on what the document can contain. It is not governed by the Administrative Procedure Act, as are the rules and regulations of federal agencies. Mortgage lobbyists who have sought insight into the negotiations between Treasury and FHFA say they have hit a brick wall.

In January, for the first time since the Treasury committed its financial support to the government-sponsored enterprises, the PSPA was amended to include policy changes which mandated changes in the government sponsored enterprise loan purchases.

The changes placed caps on loans secured by investor homes, loans deemed risky and the use of the cash window. The changes caused an uproar in the housing finance industry, and led to full-throated calls for their removal. FHFA suspended many of the most problematic elements, from the mortgage standpoint, in September.

Yet a remaining provision, according to the Mortgage Bankers Association, could hamper any future changes to the FHFA's capital rule. Specifically, those the FHFA proposed in September.

Those proposed changes would make three specific amendments to the December 2020 capital rule. Two of them directly relate to credit risk transfers.

The amendments would replace the fixed prescribed leverage buffer amount — currently 1.5% of an enterprise's adjusted total assets — with a dynamic buffer equal to 50% of its stability capital buffer. Instead of a prudential floor of 10% on the risk weight assigned to any retained CRT exposure, the prudential floor would be 5%. The requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures would be removed.

In its recent comment letter to the FHFA on proposed changes to the capital rule, the MBA criticized a provision in the January PSPA. According to the PSPA, it required the GSEs to comply with the regulatory capital framework finalized in December 2020, "disregarding any subsequent amendment or other modifications to that rule." Any further changes to this arrangement, the agreement reads, "Will require agreement between the Treasury and FHFA…"

The MBA wrote that the provision was "directed at binding the hands of future FHFA leadership rather than promoting the sound operations of the Enterprises."

The trade association, which represents a wide swath of the mortgage industry, was the only commenter that brought up the potential conflict.

"The concept of an agency tying its own hands and negating future changes to its own rule is bizarre," said Dan Fichtler, associate vice president of housing finance policy at the MBA.

That's a problem now, Fichtler argued, because it could impact the outcome of the FHFA's newest proposed changes to the capital rule.

Those changes would make credit risk transfers more economical for the GSEs. Fannie Mae put the brakes on CRT deals in the early days of the COVID-19 pandemic, and only recently restarted them. According to one analyst, some investors were earning returns on equity leveraged against CRT assets in the high teens.

By contrast, a May 2021 report on CRTs found that the GSEs lose money on the transactions.

"While smaller retained portfolios and increased CRT volumes activities meet conservatorship objectives for the Enterprises, they also reduce revenue," the FHFA noted in an accountability report last month.

Other observers, including former FHFA and Treasury officials, shrug their shoulders at the language in the PSPA.

The Treasury holds warrants to purchase 79.9% of the GSEs' common stock, said David Dworkin, president of the National Housing Conference, so it's not unreasonable that the agreement reflects the Treasury's position as a more-than-equal partner.

One compelling reason the agreement is governed by the Treasury and the FHFA, and not the APA, is to allow the two entities to quickly respond to the market and make business decisions.

He said it's also very unlikely that there would be disagreement between FHFA Director Sandra Thompson and Treasury Secretary Janet Yellen. Yet because the document can be amended at any time, and the negotiations are not subject to public scrutiny, it is vulnerable to shifts in the political climate.

"It's certainly subject to political changes," said Dworkin.

The Housing Policy Council, which represents large mortgage lenders and servicers, and whose president, Ed DeMarco, was once head of the FHFA, disagrees with the MBA, and is not pushing for changes to the PSPA. Reopening the agreement introduces uncertainty in the market. The trade association also believes that the MBA's fears are unfounded, and the PSPA cannot undercut the ability of the entity to update its own regulations.

Other stakeholders were also supportive of the FHFA's proposed changes to the capital framework, while they had some suggestions for further improvements.

The Community Home Lenders Association said reducing the leverage buffer is "a welcome change, but leaving in place overly stringent requirements that, as noted, will force the Enterprises to raise prices and shrink their credit boxes to comply."

Freddie Mac is similarly supportive of the proposed changes to the capital rule, but proposed that FHFA "go a step further and allow greater capital relief" for credit risk transfers, by using a sliding 0% to 5% credit risk transfer floor.

"The economics of CRT depend on multiple factors beyond the regulatory capital framework and take into consideration other variables such as market conditions and credit characteristics of guaranteed collateral," Freddie Mac wrote. "All else being equal, the proposed amendments to the CRT securitization framework combined with Freddie Mac's proposed adjustments significantly improve the economics of these transactions and create an incentive for the Enterprises to execute CRT transactions."

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Loans And Mortgage

Tuesday, December 7, 2021