FHFA considers IMB ‘systemically important’ and only increases risk

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First, let’s say “well done” to the Mortgage Bankers Association and others in the housing industry for fighting back About the Basel III Endgame ProposalMembers of Congress, led by Rep. Elizabeth Warren, D-Mass., have complained that Fed Chair Jerome Powell is “soft on banks,” but in fact, the housing industry has been on Capitol Hill against Powell and other bank regulators Proper blow.

Unfortunately, while members of the housing-industrial complex have given federal bank regulators a lesson in political practice, the Biden administration is preparing to designate a number of large independent mortgage banks and other non-bank companies and funds as “systemically important.” Financial Institutions”. ” ” or SIFI under the Dodd-Frank Act.

If you look, it’s easy to see where the Biden administration will end up.The Federal Housing Finance Agency just completed three reviews of non-bank sellers/servicers, reiterating that they pose a “high risk” to Fannie Mae, according to a report released last week. In fact, current administration leaders The GSEs under

“FHFA’s review is conducted through its corporate regulatory division and includes on-site inspections, focusing on loans sold to or serviced by non-bank institutions to Fannie Mae and Freddie Mac.” Bloomberg News.

The FHFA report, endorsed by Superintendent Sandra Thompson, contained the usual disparaging overtones directed at the IMB. Some risks to the GSEs include “lack of regulation.” In fact, IMB is subject to extensive state and federal regulation and disclosure.

Another spurious complaint made by the FHFA and the Financial Stability Oversight Council is liquidity. Nonbanks “do not have access to the same funding sources as banks, such as the Fed’s lending facilities or consumer deposits, and instead rely on short-term funding sources such as credit and repurchase agreements where warehouse lines are more susceptible to reductions or cancellations.”

In fact, IMBs with large service books are islands of liquidity and are able to generate large amounts of cash to fund their operations. The warehouse lines that FHFA and FSOC are so focused on are actually legally contracted and self-funded through escrow balances that IMB maintains with banks such as IMB. As market leader JPMorgan Chase. Where does the risk come from? From FHFA and the Biden Administration.

So the bizarre scenario of a bank canceling IMB’s fully secure warehouse line and losing access to escrow deposits is absurd, but the idea is considered serious business within the confines of FHFA and the Biden White House. The scenario cited by FHFA and endorsed by Supervisor Thompson never occurred.

In each of the 2009 IMB failures that occurred at Taylor, Bean & Whitaker, banks not only maintained warehouse reserves but were also prepared to provide debtor-in-possession financing to buyers of failed IMBs. Why? Because credit is sought from IMB for warehouse or default advances, the amount is fully secured by the qualifying mortgage loan. The folks at FHFA don’t seem to understand this nuance.

FHFA is also concerned that IMB is increasing its share of originating and servicing loans. In fact, IMBs currently account for three-quarters of all residential mortgage originations, and that total is likely to only rise in the future. Why? Because federal prudential regulators are strongly encouraging banks to exit servicing residential mortgages. Banks also don’t like selling loans to government-backed enterprises.

Banks such as Wells Fargo are exiting the residential market, and New York Community Bank, the last remaining bank servicer in the Ginnie Mae market, may be forced out of the mortgage market. In fact, many commercial banks have stopped selling loans to government-backed enterprises because of the bizarre progressive agenda pursued by the Biden White House. The Federal Home Loan Bank does not play the progressive game.

The FHFA report made two important recommendations to FHFA, both of which Supervisor Thompson accepted, revealing her true end. FHFA will conduct reviews of non-bank sellers/servicers, including but not limited to procedures, internal controls, and documentation. FHFA will also “actively guide risk monitoring and analysis processes within IMB, including but not limited to procedures and internal controls.” Does FHFA have Legal authority to perform this duty?

The FHFA report and these two recommendations were clearly a precursor to FHFA Director Thompson’s recommendation to FSOC to designate the six or so large IMBs as SIFIs. It seems that FHFA and FSOC are trying to document the excuse of specifying SIFI for maximum IMB to avoid another A disastrous repeat of MetLife’s legal battle.FSOC Revised rules for designing IMB as SIFI Last November.

The FHFA process seems clear. FHFA staff will conduct a systemic and controls review, and FSOC will mandate that the IMB conduct a) stress testing and b) solution planning. Both proposals are completely ridiculous and will not reduce systemic risk but will cost consumers higher mortgage costs. Are large, non-bank traditional issuers at risk ready to fight back? Maybe.

The rebuttal process to a SIFI designation under Dodd-Frank takes some time. By January next year, we may have a Republican in the White House. The big IMBs — including Mr. Cooper, Freedom, PennyMac, Rithm Capital, Lakeview and Rocket Mortgage — could learn from MetLife and give the FHFA and FSOC another defeat in court. But will they fight?

“I doubt that large non-bank traditional issuers will fight back because large companies can pay the high cost of regulation and know it will prevent or reduce competition from smaller players,” said Michael McAuley, principal at Garrett McAuley & Co. “Players The benefit is always the result of over-regulation. I’m not sure regulators think it’s unintentional.”

In the fantastic progressive world of Washington, reducing the number of large IMBs regulated as SIFIs seems like a good idea. However, in the world of real collateral and volatile markets, a lack of diversity and increasing concentration means increased systemic risk. Fewer large IMBs means more taxpayers are at risk if a default occurs, while inflation-weary consumers face higher housing costs.

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