CFPB vs FHFA
Which agency fiefdom will expand the most?
Is a fight over territory and fiefdoms in the making at CFPB vs FHFA? Government bureaucrats often seek to expand their reach as much as they can slip through in new regulations. Is the new FHFA Refi program for lower income borrowers at odds with CFPB’s new push for QM/ATR? The Consumer Finance Protection Bureau (CFPB) moved aggressively to undo many consumer friendly rules. The argument made by CFPB focuses on protecting consumers from themselves and limiting choices. Many decisions reflect rules designed as a political change from the prior administration — just because. The answer to the greatest expansion question is — CFPB. It is run by agenda driven petty bureaucrats and it gets to keep any fines. CFPB has the greatest ability to change rules on a whim. It also has no accountability or oversight.
Changes From FHFA
The low interest rates in late 2020 benefited many borrowers. At times during this period, refinance loans comprised more than 80% of all mortgage loan applications. Great for many borrowers, but what about those lower income borrowers who may have struggled? The Federal Housing Finance Agency (FHFA), which controls Fannie Mae and Freddie Mac, proposed a new program. The program targets the marginal lower income borrowers with a more lenient refinance option. Fannie Mae scheduled this availability for early June. Freddie Mac scheduled implementation for August. The ATR calculation used by CFPB is at odds with tenets of the program.
According to a report in late 2020 by data and analytics firm Black Knight, there were over 19 million high-quality refinance candidates in America. The firm defined “high-quality” refinance candidates by 4 criteria. The first two mirror underwriting desirability for any applicant. Credit meant those with credit scores of 720 or higher. LTV meant those who hold at least 20% equity in their homes. The final two focus on current financial status of the borrowers. Are they current on their mortgage payments? Could they shave at least 0.75% off their first rate lien by refinancing? More than 7 million could save at least $300 a month. And 2.5 million of those could save $500 a month or more, Black Knight said.
FHFA Lower Income Re-finance Effort
In the new program in development with FHFA, loans held by Fannie Mae and Freddie Mac would be eligible. Lenders must ensure that the borrower saves at least $50 a month in their mortgage payments. Also, the borrower must lower the loan interest rate by at least 50 basis points (one-half of a percent). For example, knocking a rate such as 3.5% down to 3% with the refinancing. The adverse market fee implemented in December (.50% of the loan amount) would be waived for borrowers with loan balances at or below $300,000. [Update: As of July 16, 2021, the extra .50% charge to refinance has been eliminated.]
Generally, an owner with a $300,000 home would not seem to fit the “low income” definition most people would think of. So this new option is stated as a low income program, but doesn’t act like one in all aspects. Certain requirements do focus on the lower income borrowers though.
Program Requirements and Benefits
The FHFA will also require that lenders provide a maximum $500 credit for an appraisal if the borrower is not eligible for an appraisal waiver. The GSEs (Fannie and Freddie) will reimburse the lender once the loan is sold to them. The FHFA said the new refi option could save borrowers an average of between $100 and $250 a month.
According to FHFA Director Mark Calabria the new refinance option will help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year. Additional requirements are that a borrower must have an income at or below 80% of the area’s median income and have been current of their payments for the last six-months, with no more than one payment missed in the last 12. Borrowers must also not have a mortgage with an LTV ratio greater than 97% and a DTI no higher than 65%. Borrowers must have a FICO score no lower than 620.
FHFA vs CFPB Conflict
Any borrower with a 65% DTI ratio risks foreclosure and not in the very far future. These individuals live in a home they truly can’t afford, mortgaging their lives for a home. However, any improvement to that unaffordability would help a borrower. It’s strange to see FHFA pushing lenders to refinance loans which would not qualify the borrowers within the Ability-To-Repay (ATR) framework. ATR keys the QM loan measurement and the CFPB has determined to strike down in its current form to make it more ambiguous. CFPB formally delayed the QM rule adoption until the 4th quarter of 2022. As a result, lenders trying to make the re-finance loans may be fined or penalized by CFPB or have unenforceable mortgages! Why would CFPB negate such a program except for a power play and bureaucratic idiocy?
Is this a fight between government agencies? Will conflicting rules trap lenders into loans which they would never have made? Will lenders be scrutinized and penalized by one agency for following the guidance of another? It’s very common for one government agency to write rules to require an entity to violate rules of a different agency. Consumers then get shuffled around the federal bureaucracy without being able to get any real answers. Ever tried to get an explanation from a federal agency?
With the Supreme Court crushing FNMA and FHLMC in a June court decision, the director of FHFA changed. Watch for new efforts by the new petty bureaucrat at FHFA to vastly expand that agency. Then watch for a repeat implementation of many of the pre-2008 causes of the mortgage/financial crisis. If so, the question becomes how long until the crash? Don’t over extend in buying or refinancing at the present time. Make sure finances are in order over the next 1 to 2 years as a precaution.