NEW YORK--(BUSINESS WIRE)--Numerous initiatives by the Federal Housing Finance Agency (FHFA) in recent weeks support the return of private capital to the U.S. mortgage market, according to Fitch Ratings.
This week the FHFA put out a request for feedback on future decreases in loan purchase limits for Fannie Mae and Freddie Mac which could go into effect as early as October 2014. The proposal comes on the heels of the FHFA's November announcement to stay the current loan limits for another year. In addition, the agencies both announced higher guaranty fees (g-fees) and loan level price adjustments (LLPAs) that go into effect April 1 2014, which will impact very high quality loans previously not subject to a LLPA.
The loan limit decrease proposal represents another of the FHFA's several measures designed to fulfill its Strategic Plan for Enterprise Conservatorships, which aim to reduce the government's role in mortgage finance while minimizing potential market disruption. Though it represents a positive step towards bringing back private capital, Fitch believes that the overall impact is likely to be modest. Fitch's view is based on the FHFA's analysis which showed that the roughly 4% cut in conforming balances (to $400,000 from $417,000 and $600,000 from $625,000 for high cost states) would have shifted around 1% of borrowers to the jumbo market had the loan limit reduction been implemented at the beginning of last year (based on 2012's full year volumes).
Similarly, increases in G-fees announced earlier this month should further encourage a return of private capital to the market. The GSEs will raise single-family ongoing g-fees by 10 basis points (bps) and also introduce or increase LLPAs tied to borrower credit risk. For example, loans that once were allowed a zero or minimal rate adjustment will now face an increase of at least 25 bps raising the cost of funding for lenders. As a potential off-set, the up-front 25 bp adverse market fee has been eliminated for most markets, except NY, NJ, CA, and FL where foreclosure costs and timelines remain lengthy. Fitch expects that at least some of these increases will be reflected in rates charged to borrowers.
These measures may result in somewhat higher non-agency production, albeit at a sharply lower total loan volume from 2012-2013's levels given the drop in refinance activity. Taking that scenario into account, it is unlikely to translate into a significant increase in private label RMBS issuance next year. Rather, these changes may further support the strong portfolio bid for high quality mortgage assets.
Fitch believes the private label RMBS market will continue its recovery in 2014 and surpass the $13 billion in volume issued this year. That said, the magnitude of growth is unclear due to ongoing and new challenges including rate volatility, skittish investor demand, and the new "qualified mortgage" rules that become effective in January.
Additional information is available at 'www.fitchratings.com'.