With deadlines extending into 2025, it’s possible that government officials currently in leadership positions at Ginnie Mae and the U.S. Department of Housing and Urban Development (HUD) may not be in office should the suit progress to trial sometime next year.

Deadlines from the magistrate judge

Initial disclosures between the two parties must be submitted to the court by Jan. 24, while agreements and proposed stipulations for information to be used based on electronic records must be submitted by Jan. 31.

Should either party in this suit wish for others to join the litigation, such motions must be filed by Feb. 16. More crucially, the magistrate judge has instructed the bank and Ginnie Mae to “have substantially completed document discovery on or before May 23, 2024,” and to have “fully completed document discovery on or before June 13, 2024.” The deadline for “all expert and factual discovery” will be March 14, 2025.

Ginnie Mae and TCB will also be given the chance to use alternative dispute resolution, including mediation, which must take place by April 25, 2025. Mediation will need to be conducted by counsel between both parties and must include at least one person who has final settlement authority on each side.

Mediation requires an independent third party to serve as mediator, and the actual proceeding “shall be private, confidential, and privileged from process and discovery, unless otherwise ordered by the court,” the document reads.

Core dispute between TCB and Ginnie Mae

The core dispute at the center of the lawsuit stems from loans given by TCB to Reverse Mortgage Funding (RMF), a formerly leading reverse mortgage lender and Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) issuer that filed for bankruptcy in late 2022, and which saw its servicing portfolio seized by Ginnie Mae soon afterward.

Ginnie Mae subsequently used its authority to extinguish RMF’s HMBS issuer status, and TCB — which believed it had first-lien authority on RMF collateral at the time it made loans to the company — saw few paths to recoup the loans following RMF’s bankruptcy.

In TCB’s initial complaint, the bank mentions appointed and U.S. Senate-confirmed officials at HUD and Ginnie Mae directly as having provided assurances that “TCB would be able to monetize the collateral if Ginnie Mae seized RMF’s mortgage servicing rights during the bankruptcy,” the original complaint said.

An election year, new Ginnie Mae leaders?

But with pretrial deadlines extending into 2025, it’s possible that these officials will no longer hold their offices by the time a trial date arrives since 2024 is a presidential election year, and the election victor will take office on Jan. 20, 2025. If the incumbent president fails to be re-elected, it’s likely that new officials will be appointed at HUD and Ginnie Mae.

New presidential administrations often bring new decision-makers and priorities with them into office, and it is unclear whether or not a new administration would be more or less likely to settle this case before trial.

While TCB previously explained that it still hopes to reach an amicable settlement with the government, “Texas Capital is confident it will prevail in this case and is committed to doing so because the law, facts and equities – in addition to the interest of thousands of seniors – are on its side” according to a statement TCB representatives shared with RMD in October after the initial complaint was filed.

However, it is also worth noting that the current front-runner for the Republican presidential nomination is Former President Donald Trump, who never appointed a Senate-confirmed Ginnie Mae president during his 2017-2021 term in office.

Incumbent Ginnie Mae President Alanna McCargo is the first Senate-confirmed Ginnie Mae president since Ted Tozer’s resignation in 2017, who served in the majority of the Obama administration.

Ginnie Mae position, recent HMBS moves

After more than three months of relative silence on the dispute, Ginnie Mae responded to TCB’s complaint in January saying that the warehouse lender lacks standing and discounts the authority the government has to extinguish a lender from its reverse mortgage-backed securities program. Ginnie Mae is seeking dismissal of the complaint in its entirety.

“When [RMF] defaulted on its obligations, GNMA exercised its right to extinguish RMF’s interest in certain mortgages in order to ensure the timely payment to investors in securities backed by those mortgages,” its early January court filing reads. “Plaintiff [TCB] also had an interest in those mortgages — prior to extinguishment — because RMF had pledged its limited interest in those mortgages to TCB as collateral for a loan.”

Despite these legal challenges, Ginnie Mae has been very active in the development of HMBS policy due to ongoing liquidity challenges within the sector. Earlier this month, the company announced that it was exploring the development of a new HMBS product in addition to the current offering, a move lauded by former Ginnie Mae President Tozer.

Last year, the company made important changes to the HMBS program including reducing the minimum size required to create HMBS pools to assist smaller issuers, while also changing certain pool eligibility requirements to ease some liquidity strain.

Scrutiny of Ginnie Mae’s stewardship of the HMBS program has also come from within the government. Last November, the HUD Office of the Inspector General (OIG) stated that the HMBS portfolio poses a “significant risk” to Ginnie Mae in 2024, largely due to the sensitivity of HECM loans to interest rates. The HUD OIG had also announced earlier that it was opening an inquiry into the extinguishment of RMF from the HMBS program.

That’s a role those government-sponsored enterprises (GSEs) have not played since prior to entering into conservatorship in the wake of the global financial crisis of 2007-2008. 

The agency overseeing those government-sponsored enterprises (GSEs) — the Federal Housing Finance Agency (FHFA) — is remaining mum on the subject of the GSEs expanding their portfolios of retained MBS via expanded bond purchases, referring to it as speculation only. 

Still, some industry observers say if the goal is to make housing more affordable, then the GSEs could achieve that objective by acting as an active investor in helping to absorb existing excess MBS supply in the secondary market. 

“If the market got the sense that [the GSEs] were back in that role, even on a limited basis compared to where they once were … and they could step in and stabilize things, that would have an impact [on rates] for sure,” said Richard Koss, chief research officer at mortgage-data-analytics firm Recursion. “How likely that is, though, I don’t even know how to handicap.” 

That excess supply, a demand imbalance estimated currently at some $25 billion monthly, has surfaced in the wake of the Federal Reserve launching its tapering program, known as quantitative tightening (QT), an effort to wind down some of its combined multi-trillion dollar portfolio of Treasuries and MBS.

QT was phased in starting in mid-2022 — shortly after the Fed began escalating its benchmark interest rate. As of early January 2024, agency MBS on the Federal Reserve’s balance sheet totaled $2.4 trillion, down from $2.7 trillion in June 2022. 

Historically, prior to the global financial crisis and Fannie and Freddie being placed into conservatorship, the GSEs added “a bit of a cushion” in the market, according to Community Home Lenders of America (CHLA) President Taylor Stork, who also is chief operating officer at Developer’s Mortgage Co.

“They bought mortgage-backed securities when demand fell, causing that demand to come back in line, and then they would slow down when demand was high,” Stork said. “That helped to keep spreads pretty consistent over the years and to make sure that this business [the housing industry] isn’t quite so topsy-turvy every time there is an economic change.”

The Fed’s monetary policy moves over the past two years — tapering its purchase of MBS and Treasuries along with increasing its benchmark interest rate from near 0 to 5.25%-5.5% range — have combined to help drive up mortgage rates nearly 4 percentage points since January 2022 and also expanded the supply of MBS relative to demand. 

Adding to rate pressure and MBS supply last year was the financial woes afflicting banks — another major source of MBS investment.

“You had the bank failures last year, including Silicon Valley Bank, Signature Bank and First Republic,” said Mortgage Bankers Association (MBA) Senior Vice President and Chief Economist Mike Fratantoni. “As a result of particularly Silicon Valley, the FDIC [Federal Deposit Insurance Corp.] wound up with almost $100 billion in MBS, which they were able to sell very quickly at not much of a discount, so that’s done.” 

If there is more MBS supply than demand, then MBS yields are enhanced for investors, resulting in lower bond prices, given the inverse relationship between the two. In a market in which supply exceeds demand, investors have the advantage in pricing.

Higher yields commanded by investors in the MBS market, in turn, push mortgage rates higher in the primary market. That’s because most loan originators rely on securitizations for liquidity and are forced to raise mortgage rates as MBS yields for investors increase — if they want to remain marginally profitable. 

That pricing dynamic also can fuel wider spreads — as measured, for example, by the difference between rates for 30-year fixed mortgages versus 10-year Treasuries.

“We’re basically saying that getting rates down is the most important thing for homeownership affordability, and so it certainly would seem to be in their [the GSE’s] mission [to buy and retain MBS],” Olson said. “That is the reason for our call for action on this and why it’s important.

“… There’s just so many areas where historically excessive rates are causing an imbalance within the system.”

Rate volatility

One component of the rate spread today that is helping to push it well above the historically normal range of 1.7 to 1.8 points, according to Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, is the risk premium demanded by investors to account for the rate volatility sparked in the main by the Fed. 

The spread between mortgage rates and 10-year treasuries rose above 3 points in October of last year and has recently been hovering in the 2.75-point range — in the wake of the Fed’s December meeting in which it signaled it was likely to pivot this year toward rate decreases.

“One of the tricks about mortgages is rate volatility translates directly into prepayment uncertainty,” the MBA’s Fratantoni said. “So, higher [mortgage] prepayment risk directly widens that spread because MBS are sort of uniquely susceptible to that prepayment risk.”

The takeaway: If rate volatility subsides as the Fed makes even clearer in the months ahead where it’s headed on future rate and QT policy, then the risk premium MBS investors require is expected to shrink. That, in turn, should help to contract what has been an abnormally high spread and create some long-overdue persistent downward pressure on mortgage rates.

Hunsaker said a key spread to monitor to better isolate that risk premium is the option-adjusted spread, or OAS. He said the OAS has been hovering in the range of 30 or 40 basis points. A higher OAS implies more return is being demanded by investors for perceived risk.

“I don’t think this [current OAS] range is abnormal,” Hunsaker said. “I think supply and demand is more or less settled out at fair value ranges [in a post-Covid world where the Fed is not the major buyer in the MBS market].

“…As we get through March, April, May, June and we get through the election, you would expect that there’s less uncertainty, or at least a narrower distribution of potential interest rate paths, and if that happens, the option premium [measured by the OAS] that you have to get paid, the incremental yield you have to get paid [for the risk as an investor], should shrink, and so all else equal, that should mean lower borrowing costs….”

Hunsaker added: “How you could get the… option adjusted spread into a different range, then, would require interest rate volatility to come down further [and that’s] independent of supply and demand [factors].”

If the MBS market remains the domain of private-sector investors (i.e., money market funds, overseas buyers, real estate investment trusts, banks and other private players), it is expected to result in a new normal in which rates and spreads settle in a tad higher than in the recent past — when the Fed and/or GSEs also were active investors in MBS.

“Our forecast is for spreads to narrow over the next couple of years, but we’re going to be north of 200 [comparing 10-year Treasuries with 30-year mortgage rates] even once investors adjust, so it’s not going to be the 170 or 180 [basis point spreads] that we always used to think were normal,” Fratantoni said. “That’s just reflecting the new normal [in which neither the Fed nor the GSEs have a finger on the MBS scale as major buyers].”

Fratantoni adds that longer-term, he expects the 10-year Treasury yield to settle at around 3.5%. That implies a new normal for the market where mortgage rates settle in at somewhere around 5.5% longer term, assuming a 200 basis-point spread over 10-year Treasuries.

If the Fed were to end its current round of tapering, however, and reinvest all the proceeds from asset rolloffs into Treasuries, or resume asset purchases, for example, and the GSEs also became more active investors in MBS beyond their existing caps, then spreads and rates could be reduced even further, market experts suggest. 

“In terms of the level of mortgage rates, if Treasuries drop [their yields], mortgage rates will drop, too, as long as that spread doesn’t widen,” Fratantoni said.

He added in a webinar this week sponsored by Snapdocs that an end to the Fed’s QT [asset rolloffs] this year is likely. 

“It should help to bring spreads in,” Fratantoni said, “but it all depends on exactly how they do it.

“I think at least it’s going to bring rates down,” he added.

Recently released minutes from the Fed’s Federal Open Market Committee’s meeting in December indicate that some participants want to start discussing “the technical factors” that would guide a Fed decision to slow the pace of asset runoff “in order to provide appropriate advance notice to the public.” 

In addition, Dallas Federal Reserve Bank President Lorie Logan suggested recently that the Fed should begin to slowly wind down its bond tapering program and ultimately end its QT balance-sheet reduction program. 

By slowing or ending asset runoff, industry observers say the Fed essentially decreases the net supply of bonds in the market — which theoretically should help to narrow spreads and also help to put downward pressure on mortgage rates.

“Given the historically high spreads, this is a good time to move in that direction,” CHLA Executive Director Scott Olson said.

GSE role

If the GSEs stepped back in to purchase MBS only up to their current $225 billion caps under the FHFA’s Preferred Stock Purchase Agreements with the U.S. Treasury Department, however, the impact long-term “would be so modest, so incremental, it’s probably not worth muddying the waters with respect to where we’d like the GSE business models to go going forward,” Fratantoni said. 

The Fed may well slow or even end its existing tapering program this year, but Fratantoni said he doesn’t see the Fed, or the GSEs for that matter, stepping back into the MBS market as buyers/investors in a major way. Under the Fed’s current QT program, it is allowing up to $60 billion in Treasuries and $35 billion in MBS to roll off its balance sheet monthly.

“…I think listening to what Fed officials say, it’s unlikely that they would start buying MBS again, and listening to what FHFA says, it’s unlikely that that would be a policy choice for them, either.

“But if we we’re to gauge what the relative impact would be, there’d probably be a larger impact from the Fed starting [purchases] again than from the GSEs starting again, although it’s not likely either is going to happen.”

Dave Stevens, CEO at Mountain Lake Consulting and former president and CEO of the MBA, stressed, however, even if the GSEs — Fannie and Freddie — used up the remaining combined $266 billion MBS purchase capacity (estimate as of Nov. 30, 2023) under their separate $225 billion retained-mortgage portfolio caps, “it would suck up [the estimated $25 billion monthly MBS imbalance in the market] for at least six months.” Short-term, he added, that would help to drive down mortgage rates and make housing more affordable — during an election year.

“The Federal Housing Finance Agency (FHFA) will not engage in speculation regarding the referenced ideas and theories,” the FHFA media team stated in response to a HousingWire query about the possibility of the GSEs expanding their MBS investments.

Stevens added that FHFA Director Sandra Thompson “is well aware of this issue.” 

“I’ve heard about meetings she’s had with others where she said that [the GSEs returning to the MBS market] has no chance at all being considered, but you know, things change,” added Stevens, who served as a key housing-policy adviser to former President Barack Obama. “She knows that if [President] Joe Biden doesn’t get reelected, her job’s gone. It’s just an interesting time.”

Reporter’s Note: David Stevens, who dedicated his life to the housing industry, serving in both public- and private-sector leadership roles, passed away this week, shortly after HousingWire interviewed him for this story. Stevens, 66, was diagnosed in 2016 with stage 4 prostrate cancer. “The real estate finance community mourns the loss today of one of its great leaders and fiercest advocates,” said MBA President and CEO Bob Broeksmit in a statement issued Wednesday, Jan. 17. You can read more here.

Released on Tuesday morning, the move is a further attempt to address the well-documented liquidity challenges that have been plaguing the reverse mortgage business for most of the past year, stemming from the late 2022 bankruptcy of Reverse Mortgage Funding (RMF), the run-up in interest rates and a precipitous drop in loan volume.

Ginnie Mae on new product development, current HMBS program

“In light of continued liquidity constraints in the reverse mortgage sector, Ginnie Mae is exploring the viability of a new securitization product that would accept HECM loans with balances above 98 percent of FHA’s Maximum Claim Amount (MCA),” the announcement explained. “This new product will not change the requirements for the existing HMBS program, where HECM loans with balances at or above 98 percent MCA are required to be bought out of HMBS.”

When a HECM loan reaches 98% of its MCA, current rules stipulate that the issuer or investor must buy the loan out of its HMBS pool as a stability-ensuring measure for the broader HMBS program. By exploring a new product that would allow loans with a higher balance to be a part of a new securitization, Ginnie Mae is aiming to add more stability to the secondary reverse mortgage market.

In an accompanying statement, Ginnie Mae President Alanna McCargo makes clear that this potential new reverse mortgage security would be in addition to the current HMBS program and not a replacement for it.

“Ginnie Mae remains committed to the HMBS program, which supports an important tool that enables seniors to tap into their home equity,” she said. “This potential product exploration reflects our focus on current liquidity issues affecting the secondary mortgage market.”

HECM warrants special attention because of demographic trends, and the financial circumstances of older Americans.

“Given the growing population of older Americans that may need to rely on home equity for financial support, continued efforts to provide stability in the secondary market are crucial to the ongoing health and access to the FHA HECM product,” McCargo explained.

Industry response

The National Reverse Mortgage Lenders Association (NRMLA) lauded the announcement and Ginnie Mae itself for its response to current reverse mortgage industry liquidity challenges, according to a statement from NRMLA President Steve Irwin.

“NRMLA, and its members, are delighted by the news from GNMA that they will start exploring additional securitization products to expand and enhance the HMBS program,” Irwin said. “GNMA launched a couple of significant changes to its pooling requirements for the HMBS program in 2023, and I commend Ginnie’s continued attention to the HMBS program so as to further mitigate HMBS Issuer liquidity risk.”

Ginnie Mae has publicly commented in the past about the strain on its resources that its assumption of a large HMBS portfolio created, and Irwin commended the company for its attention to reverse mortgage issues despite those challenges.

“To have the leadership at GNMA devote its limited resources to continual HMBS program improvement underscores HUD’s dedication to the mission of the HECM program,” he said.

Recent Ginnie Mae/HMBS history

The HMBS program has been on the minds of people at Ginnie Mae more frequently following its seizure of RMF’s servicing portfolio in December 2022.

Last year, the company made important changes to the HMBS program including reducing the minimum size required to create HMBS pools to assist smaller issuers, while also changing certain pool eligibility requirements to ease some liquidity strain.

Last November, the HUD Office of the Inspector General (OIG) stated that the HMBS portfolio poses a “significant risk” to Ginnie Mae in 2024, largely due to the sensitivity of HECM loans to interest rates. The HUD OIG had also announced earlier that it was opening an inquiry into the extinguishment of RMF from the HMBS program, as the government aims to defend Ginnie Mae in a lawsuit from one of RMF’s former creditors.

In the initial October complaint, TCB alleged that the government-owned company “extinguished, in return for no consideration, TCB’s first priority lien on tens of millions of dollars in collateral” stemming from the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program.

Ginnie Mae: loans are our ‘absolute property’

In a filing to the court submitted on Wednesday, Ginnie Mae — using its official acronym “GNMA” in court filings — said that TCB cannot challenge the authority the company maintains over the reverse mortgage securities program.

“When [RMF] defaulted on its obligations, GNMA exercised its right to extinguish RMF’s interest in certain mortgages in order to ensure the timely payment to investors in securities backed by those mortgages,” the filing reads. “Plaintiff [TCB] also had an interest in those mortgages — prior to extinguishment — because RMF had pledged its limited interest in those mortgages to TCB as collateral for a loan.”

TCB’s interest, Ginnie Mae said, “derived entirely from RMF.” But by exercising its authority to extinguish RMF’s interest, Ginnie Mae “necessarily eliminated TCB’s interest as well,” attorneys for the government explained. “By law, the mortgages were the ‘absolute property’ of GNMA.”

TCB “ignores that each of the relevant authorities” underpinning the core elements of the dispute corroborate that Ginnie Mae “had a right in the event of default to extinguish the issuer’s interest in the mortgages and related interests,” including Ginnie Mae’s charter statute, implementing regulations, RMF’s contracts with both Ginnie Mae and TCB and bankruptcy court orders.

These elements “repeatedly and unambiguously disclosed that GNMA had a right in the event of default to extinguish the issuer’s interest in the mortgages and related interests,” government attorneys said. “TCB’s contract with RMF and the bankruptcy court order also expressly stated that TCB’s right to a lien was subject to GNMA’s extinguishment rights.”

Since TCB is “a sophisticated entity with substantial experience in this field and was well aware of and familiar with these authorities,” the complaint is “without merit and should be dismissed,” they added.

TCB claims fail ‘as a matter of law’

In its original complaint, TCB took issue with the extinguishment based on its interest in HECM-backed Securities (HMBS) tails, or “the additional amounts added to the balance of the HECM over time,” the attorneys explained. Ginnie Mae, however, says that TCB is attempting “to draw a distinction between the original principal balance” and the tails, which is an argument the government claims is unsupported.

“[T]he plain text of the statute, regulations, and agreements authorize GNMA to extinguish all interests in the HECMs, and the tails are part of the HECM,” the filing said. “To extinguish all interests in the HECMs necessarily includes extinguishment of any interests in the tails.”

Included in the filing as attachments are the guaranty agreement for the Ginnie Mae HMBS program, a declaration in support of the government’s position by Ginnie Mae’s SVP for the Office of Issuer and Portfolio Management, a document detailing conditions of default in the program dated Oct. 31, 2022, special requirements for HECM reverse mortgage loan pools, TCB’s tail agreement and documents from RMF’s bankruptcy case unfolding in the U.S. District Court for the District of Delaware.

TCB’s position, recent hearing

In a statement submitted to RMD in October, representatives for TCB said that Ginnie Mae has refused to honor prior agreements and legal obligations by failing “to desist from its unlawful seizure of collateral that rightly belongs to [TCB].”

A failure to take action, TCB claimed, would harm the bank itself, but would also “have a chilling effect on the industry, including the ability and willingness of Texas Capital and others to participate in programs like this one,” the October statement said. “Ultimately, the victims of Ginnie Mae’s unlawful action will be the seniors who rely on the reverse mortgage program to pay basic expenses.”

TCB asserted in its original complaint that in March 2023, “the FHA’s current Commissioner, who also holds the title of Assistant Secretary of Housing And Federal Housing Commissioner at [the U.S. Department of Housing and Urban Development (HUD)], stated that FHA disagrees with Ginnie Mae’s position.”

On Wednesday, a hearing was held before Magistrate Judge Lee Ann Reno, who ordered that the government and TCB are required “to file either an amended joint proposed scheduling order or other advisory on or before Jan. 17, 2024.”

TCB previously detailed that it hopes to reach an amicable settlement with the government. Previously, a representative for HUD advised RMD that it does not comment on active litigation.

“The report highlights for HUD leadership 35 open recommendations from OIG reports that, if implemented, will help HUD address its most serious management challenges and enhance critical aspects of its operations,” the OIG said in an announcement.

Some of the issues outlined in the report include those related to the promotion of health and safety in HUD-assisted housing, the management of fraud risk, improving the technology posture of the department and addressing cybersecurity shortcomings, protecting whistleblowers and reducing counterparty risk.

“Of the 35 priority open recommendations, 24 recommendations were identified in FY 2023, and 11 new recommendations were added for FY2024,” the announcement said. “Each priority open recommendation is an opportunity for HUD to take specific action to increase the integrity of its operations and programs.”

Last year’s report saw HUD take substantive action to address seven outstanding issues, the OIG said.

“For example, HUD improved its oversight of public housing authority compliance with the Lead Safe Housing Rule by clarifying what is required when a public housing authority determines target housing is exempt from the rule,” the announcement explained. “In addition, HUD improved its management over the flood insurance program by developing a reporting control to detect HUD-insured loans that do not maintain required flood insurance.”

The report is designed to make recommendations that may appear incremental, but are designed to create a discernible impact if they are implemented according to HUD OIG Rae Oliver Davis.

“By focusing its efforts on these recommendations, HUD will be better positioned to protect whistleblowers, improve how Ginnie Mae handles troubled mortgage-backed security issuers, address systemic challenges with improper payments, and address recommendations that would put billions of taxpayer dollars to better use,” Davis said in a statement.

As of Jan. 2024, there are more than 800 open recommendations the HUD OIG has made to the department to improve its standing. The 35 chosen to appear in this report are organized based on those identified to be top management challenges this year.

Six recommendations fall under the top-line priority of promoting health and safety standards in HUD-assisted housing, and include resolving complaints promptly; ensuring compliance with the lead safe housing rule; and improving oversight of lead-based paint hazard remediation.

Mitigating counterparty risks is the next largest priority, encompassing recommendations including asking Ginnie Mae to improve its guidance for “troubled” mortgage-backed securities (MBS) issuers.

IT modernization is next on the list, perhaps taking on a higher level of importance due to recent cybersecurity incidents involving major private-sector players in the housing industry including loanDepot, Fidelity and Mr. Cooper.

The popularity of home equity lines of credit (HELOCs) and closed-end second (CES) mortgages last year was reflected in the secondary market as well, where the volume of securitizations rose sevenfold from 2022 levels. That increased capacity in the private-label securities market is key to continuing the momentum of home-equity lending into 2024, industry experts say.

What remains an unknown, however, is whether housing inventory, pricing and interest rates will settle into a goldilocks zone that allows home equity lending to flourish. Market indicators so far appear tentatively promising.

Real estate data firm ATTOM reports that overall HELOC loan originations by count were actually down by 7% in the third quarter of 2023 as interest rates spiked. According to Freddie Mac, rates for 30-year fixed mortgages rose during the quarter to the mid-7% range — and stayed in that range until mid-December, when they finally fell below 7%.

Variable-rate HELOCs and fixed-rate CES mortgages typically carry rates that start a couple points above the prevailing 30-year fixed rate.

“An estimated $54 billion in equity withdrawals were forgone in Q3 [2023] as rising interest rates increased the cost of equity utilization,” said ICE Mortgage Technology Vice President of Enterprise Research Andy Walden in the company’s December 2023 Mortgage Monitor report.

Even though HELOC originations were down due to the towering rate environment during the third quarter of last year (the most recent data available), the Federal Reserve reports that balances on outstanding HELOC loans increased during the period by $9 billion, to $349 billion. In addition, Fed data shows that total outstanding loans linked to home-equity products also increased in the third quarter — to $501 billion, up 2.3% from $490 billion in the second quarter. 

A recent report from real estate analytics firm CoreLogic indicates that for U.S. homeowners with outstanding mortgages — some 63% of all homes — home equity tied up in properties jumped by 6.8% year over year as of the third quarter of last year. That represents an aggregate gain of $1.1 trillion, or an average of increase of more than $20,000 for each borrower since the third quarter of 2022. 

As of the end of September last year, home equity for mortgaged properties in the nation totaled nearly $17 trillion, CoreLogic reports, representing a deep reservoir of potential future business for lenders nationwide. 

“HELOCs were the major story in the later part of 2022 and persisted throughout 2023,” said John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co. “We’ve seen a resurgence of a product that was largely dormant for a decade.

“HELOCs have easily been the product with the largest increase in [loan]-trading volumes.”

Variables ahead

The path ahead for home equity loans — with HELOCs and CES mortgages representing the bulk of the market — is expected to be closely tied to the pace of interest rate declines as the Federal Reserve is expected to begin ratcheting its benchmark rate downward over the next year. If rates drop far enough, demand for home equity loans could subside, particularly HELOCs, as more homeowners opt for cash-out refinancing, according to Toohig.

Selma Hepp, chief economist for CoreLogic, said, with respect to HELOCs, that homeowners “aren’t going to sell their homes because there’s this lock-in effect now” with so many mortgages outstanding carrying a 3% to 4% rate.

“So, until mortgage rates get down to the 5% range … they really have to drop a lot to change that [lock-in effect] dynamic,” she added. “Because of a lack of [housing] inventory, people are deciding to add more to their [existing] home or spend on their home because there’s nothing else out there to replace that home with a better home.”

“Between late October and mid-December, the 30-year fixed-rate mortgage plummeted more than a percentage point [but] since then rates have moved sideways as the market digests incoming economic data,” Sam Khater, Freddie Mac’s chief economist, said in a recent media statement. “Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds. 

“While lower mortgage rates are welcome news, potential homebuyers are still dealing with the dual challenges of low inventory and high home prices that continue to rise.”

Mortgage Bankers Association (MBA) Senior Vice President and Chief Economist Mike Fratantoni, in a recent forecast report, said mortgage rates are expected to end 2024 “closer to 6% … compared to mortgage rates that are just below 7% as of this writing.”

“We’re really looking at rates [in 2024] staying above 6.5% for most of the year, with an outside possibility of getting a 6.25% rate, maybe a bit lower, closer to 6% by the end of the year,” Todd Teta, chief product and technology officer at ATTOM, said in an end-of-year market-outlook webinar.

Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, said in case “where the fed cuts 250 basis points [2.5 percentage points], I’m not sure that’s necessarily a scenario where housing volumes are great and housing prices are strong because that would conceptually be probably pretty correlated with a really weak consumer or some recessionary-type outcome.”

“And then you have to have wider spreads which means the value of creating those mortgages and securitizing them is again hampered,” he added.

Housing inventory, as Hepp points out, also is a major variable with respect to home-equity lending, with a lack of inventory a factor in helping to spur demand for HELOCs and CES.

“The rule of thumb is that available inventory rises when mortgage rates rise, and inventory falls when mortgage rates fall,” ATTOM’s Teta said. “People sometimes ask me, ‘If rates fall, won’t that mean there’s a lot more sellers that can sell because they want to move?’

“And the answer is it will create more supply, but it actually spurs demand more than supply.” 

The goldilocks effect

Whether those rate and related housing inventory forecasts pan out to create a goldilocks moment for HELOCs and other home-equity products in the year ahead, time will tell. But the infrastructure in the secondary market to create liquidity for the product via securitizations is already in place and being fed by nonbank and bank lending alike.

“We estimate that an additional $4 billion of PLS [private-label securitization of] HELOC and CES [loans] entered the residential mortgage-backed securities market in 2023 [across some 16 offerings] — a meaningful increase from 2022 … representing an almost 7x increase,” states a recent sector outlook report by the Kroll Bond Rating Agency (KBRA). “For 2024, we project $6 billion in PLS HELOC and CES.”  

By comparison, KBRA data shows that in 2022 there were only three HELOC/CES-backed securitization offerings valued in total at about $626 million.

In fact, in the final days of 2023, J.P. Morgan sponsored a $258 million private-label securitization involving some 3,000 HELOC loans, with United Wholesale Mortgage (UWM) and loanDepot originating the lion’s share of the HELOCs backing the offering. It was the third such offering sponsored by J.P. Morgan in 2023, with those three securitizations backed by HELOCs with a combined value at issuance of $725.6 million.

“UWM and loanDepot’s production of HELOC loans began fairly recently, with the originators launching these products in 1Q 2023 and 3Q 2022, respectively,” a KBRA bond report on the offering states. “This comes at a critical time for American households grappling with the combined effects of elevated interest rates, inflation and steep living expenses. 

“Meanwhile, rising property values over the past two years have provided homeowners with substantial equity in their homes.”

Depository institutions, primarily banks, continue to dominate the home equity space, given they have the ability to hold loans in portfolio — with Bank of America, Citizens Bank and PNC Bank leading the pack last year, according to a recent report by Inside Mortgage Finance (IMF). Nonbanks, however, are starting to light up score board as well, with Spring EQ and Figure Lending ranking among the top 10 lenders in the sector, according to IMF, and Rocket Mortgage making a showing at No. 16 in the most recent rankings.

Hunsaker said major nonbank originators have now planted their flags in the home equity market. They include lenders like UWM, loanDepot and Rocket Mortgage. Rocket, like J.P. Morgan, also sponsored three securitizations in 2023 backed by home equity loans (CES mortgages) valued in total at $922.3 million at issuance.

“And then you had the secondary capital markets step up because it didn’t do them [lenders] any good to be able to originate a ton of volume if they didn’t have a place to go with it,” Hunsaker said. “Lenders like J.P. Morgan have done a great job of developing those channels for securitizations.

Hunsaker stressed that there’s trillions of dollars in household balance-sheet wealth “that’s sitting in properties that people aren’t willing to sell, and they’ve got a lot of financial and household balance-sheet incentives not to sell.”

“So, I think [home-equity loans are] a good personal finance solution for a lot of Americans and the originators themselves,” he added. “… I think it solves a lot of people’s problems, but it does create more leverage in the financial ecosystem in the event of house price drawdowns — which we don’t really have right now.”

The housing industry, including the secondary market it feeds, is still likely to be sluggish in 2024, with marginal improvements in some sectors as others tread water or retreat slightly, industry players who spoke with HousingWire predict. 

Still, a sluggish to slightly better forecast for 2024 beats the hardscrabble path of retrenchment the industry endured in 2023. Last year, fast-rising rates and related volatility, coupled with liquidity challenges in the bank and nonbank sectors, high home prices and a shortage of housing inventory all worked together to suppress mortgage originations and the secondary market outlets for those loans as well.

“Notwithstanding the recent mortgage rate rally [at yearend 2023], housing and mortgage markets will enter 2024 at approximately the same level as they entered 2023,” said Doug Duncan, senior vice president and chief economist at Fannie Mae, in the agency’s yearend commentary. “Thus, while we think home sales will start to rise over the new year, the combination of modest increases in home prices and still-elevated interest rates suggest a slow pace of recovery from previously recessionary levels of housing activity.”

John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co., said many of the same headwinds the market faced in 2023 remain as we roll into 2024. He said among them are higher rates (down a bit at yearend, but still in the high 6% range); “… the lack of liquidity in the banking sector; increasingly challenged affordability; and [consumer] credit starting to show some early cracks on the lower end of credit and with younger borrowers.”

Still, an interest-rate drop and soft landing for the economy, if the latter is truly achieved, will break some of the ice in a chilled housing market.

“For 2024, should the Federal Reserve determine they have overcorrected and start to lower rates [as indicated at the Fed’s December Federal Open Market Committee meeting], you will see a surge in trading volumes,” he added. “Discounts will be less impactful, loans will trade closer to par or gains again, and much of the frozen underwater coupons will transact again.

“Should credit break and the consumer buckle, [however,] you could see home prices fall, delinquencies and charge-offs on the rise and that will negatively impact pricing in a market with limited liquidity.”

It remains a guestimate game as far as when the Federal Reserve — which paused rates at its final meeting in 2023 — will decide to begin rolling back its benchmark rate in the year ahead from the current range of 5.25%-5.5%.

As 2023 moved toward a close, 30-year fixed rates had dropped into the mid-to-high 6% range. Few, if any, industry groups or market experts, however, have been accurate in predicting rates very far out in the current topsy-turvy market.

“If you look at futures, you’re looking at lower [Fed] rates by May of next year,” said Tom Piercy, chief growth officer at Incenter Capital Advisors (previously Incenter Mortgage Advisors). “I wouldn’t make a bet on it is because there’s just so much complexity in this.”

MSR sector

Piercy, whose shops advises both banks and nonbanks on mortgage servicing rights (MSRs) transactions, said the year ahead for MSRs will be impacted negatively if rates decline, but he adds rates would have to adjust downward significantly to accelerate loan-prepayment speeds, which would draw down the value of MSR packages. He said marginally lower rates would affect the returns holders of MSRs get from parked escrow accounts, however, which does impact MSR pricing.

Piercy expects that the combined MSR trading volume in the coming two years (2024 and 2025) will be on par with or slightly better than the combined trading volume of 2022 and 2023, when rates spiked and more than $1 trillion in MSR deals transacted each year.

“Over the next three years, including 2023, [we estimate] sub-$4 trillion [in MSR trades], maybe in the high $3 trillion [range], and again that’s for 2023 through 2025,” Piercy said. For 2023, slightly greater than 1.1 trillion in MSRs are expected to have traded, he added.

Part of that trading volume in 2024, Piercy said, is expected to be driven by MSR sales resulting from the continuing merger and acquisition (M&A) activity in the nonbank sector of the market.

“Unless there’s some type of pickup in the forecast for originations, I think you’re going to see still an active M&A market through 2024,” he explained. “Many shops will probably look to become part of a larger, more financially stable platform.

“We’re forecasting right now a fairly strong Q1 for MSR sales. I think it’s going to be a robust market.”

MBS sector

Robust is not the adjective to describe what’s ahead in 2024 for the agency (Fannie Mae, Freddie Mac and Ginnie Mae) mortgage-backed securities (MBS) market, however. Market observers say outsized spreads between the 30-year fixed mortgage rate and 10-year Treasuries and subpar MBS clearing rates are likely to continue, given the imbalance in supply and demand in the market as the Federal Reserve continues to unwind its $2.5 trillion portfolio of MBS. 

According to projections by real estate investment firm the Amherst Group, agency MBS net issuance for 2024 is estimated at $300 billion, up slightly from $250 billion in 2023 — but still down significantly from the barnburner year in 2021, when net issuance totaled $870 billion. Net issuance in MBS represents new securities issued less the decline in outstanding securities due to principal paydowns or prepayments.

The Federal Reserve’s ongoing quantitative easing is expected to contribute an excess MBS supply to the market in 2024 of some $225 billion, which will need to be absorbed in addition to the projected $300 billion in net new issuance. 

“Generally, our view has been that mortgages are really undervalued,” said Amherst Chairman and CEO Sean Dobson. “I’ve been doing this for 30 years, and they’re about as good in value as they’ve ever been. 

“But we don’t see a lot of snapback, with mortgages getting back in line [in terms of interest rates] anytime soon. … Mortgage rates are high and one big reason … is the [agency MBS] investor base is impaired, and it’s not likely to be fixed soon.”

Dobson added that, in his view, monetary policymakers didn’t fully grasp that when the Fed stopped buying mortgages, “they had displaced the actual buyers for so long that the actual buyers are now gone. 

“… Now you can buy billions of dollars in bonds [MBS] that are really undervalued relative to their intrinsic risk because there’s just no sponsor [a major new buyer since the Fed’s pullback].”

Richard Koss, chief research officer at mortgage-data analytics firm Recursion, also offers a bleak assessment of the agency MBS market ahead — primarily because mortgage originations are likely to remain depressed, which means agency MBS issuance will be depressed as well. 

Koss points to the huge volume of low-rate mortgages outstanding as the vexing problem the market faces, adding that low-rate legacy (2020 and 2021) mortgage-backed pools “are mostly discount bonds in the current [high] rate environment.”

“All the 4.0% and lower mortgages that dominate the market are less than four years old,” he said. “If you have a 3% mortgage, you need a 2.5% rate to justify refinancing, which is a 1% Treasury yield. 

“That could happen, but we don’t want it to, since it means some kind of disaster. I think a mortgage winter has frozen things hard and conditions are such that we can only expect a measurable improvement out past 2030.”

The Mortgage Bankers Association (MBA) estimates that total mortgage originations in 2023 will come in at about $1.6 trillion, down considerably from the $4.4 trillion in originations chalked up in the banner year of 2021. Next year, the MBA forecasts total originations at slightly more than $2 trillion — and its most current origination forecast shows only modest improvement in 2025, with originations (purchase and refinance) reaching $2.43 trillion. 

RMBS sector

The origination downturn and rate volatility in 2023 negatively impacted the private-label residential mortgage-backed securitization (RMBS) market. Many market experts, however, expect a tailwind of declining rates for the year ahead as a result of recent signals from the Federal Reserve that rate cuts are on the table, starting as soon as the end of the first quarter of 2024.

“Additional rate hikes no longer appear to be part of the conversation, MBA senior vice president and chief economist Mike Fratantoni said in a statement reacting to the most recent Fed rate decision. “It is all about the pace of cuts from here.

“…We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market. We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations, following an extraordinarily slow 2023.”

A report published in late November by Kroll Bond Rating Agency (KBRA) — which tracks RMBS offerings across the prime, nonprime, credit-risk transfer and second-lien sectors (RMBS 2.0). —  assumed that the Fed was “closer to peak interest rates.” That assumption bodes well for the private-label market in 2024 — relative to its performance in 2023.

“We expect 2024 conditions to be more favorable and RMBS 2.0 issuance levels to be slightly higher than in 2023 at $56.5 billion (a 9% increase),” the KBRA report states.

Andrew Rhodes, senior director and head of trading at Mortgage Capital Trading, said the winter months ahead are going to be rough going for the housing market, including RMBS issuance.

“I think 2024 [overall] is going to be better from a [loan] origination standpoint, but I don’t think it’s going to be large increase,” he added. “…I really do think that 2025 will be a lot better, but that’s pretty far forward.”

Tailwinds 

On a brighter note, Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, points to the expansion of second-lien products in the primary market as a loan-origination and RMBS volume-driver in 2024, given the record-levels of home equity available to homeowners, many of whom are now locked into low-rate mortgages and have little incentive to sell or buy a new house.

“There’s this big pool of second liens and HELOCs [home equity lines of credit] that some of the originators have started to use as a key part of their toolkit, and you’re hearing them talk about it on earnings calls,” he said. “And so, I think that probably puts a kick in the pants to what 2024 [RMBS] volumes could look like.”

Charley Clark, a senior vice president and mortgage warehouse finance executive at EverBank (formerly known as TIAA Bank), also strikes a note of optimism for 2024 when it comes to the prospects for housing industry, specifically the large independent mortgage banks (IMBs) that feed the origination and securitization pipelines. Clark notes that EverBank serves about 40 of the largest mortgage banking companies in the nation.

“I think there’s definitely still some of the mom-and-pop shops [IMBs] — or let’s say a company with $20 million or $25 million or below in adjusted tangible net worth — that will be looking to sell,” he said. “But most of the big companies have solid balance sheets and have started to actually stop the bleeding. 

“I’m encouraged because these companies [large IMBs] are much better positioned now. They’ve made the cuts, at least most of the cuts they need to make to right-size for where the industry is heading. And the best companies have really done a good job of that, so they’re positioned to do well next year, but it’s still going to be tough.”

It also has been a brutal year for the secondary market that creates liquidity for mortgage lenders as greatly reduced mortgage originations, liquidity challenges and interest rate volatility have played havoc in the whole-loan trading as well as the private-label and agency securitization channels. 

“The market progressively got worse around the start July of 2022 and then throughout the course of 2023, driven by the Federal Reserve raising rates and the lack of liquidity in the banking sector,” said John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co. “With first-lien mortgages … the trading volumes are down from 2021 and 2022 peak levels. 

“That’s largely due to the rapid change in rates, which are causing loans to trade at fairly steep discounts, and not due to credit performance. It’s purely driven by interest rate risk, and it’s also being driven by a lack of liquidity and a loss of deposits in the banking system [a major purchaser of whole loans and mortgage-backed securities in the past].”

Interest-rate and liquidity challenges also negatively impacted the agency (Fannie Mae, Freddie Mac and Ginnie Mae) mortgage-backed securities (MBS) market in 2023.

A recent report from real estate investment firm The Amherst Group forecasts that the combined net issuance of agency MBS is projected at $250 billion for 2023, compared with $530 billion last year. Those figures reflect a substantial reduction in new and existing-home sales and refinancing as interest rates ballooned past 7% over the period, driven by the Federal Reserve’s aggressive monetary-tightening policy.

By comparison, agency net MBS issuance in 2021, when interest rates were half of what they are today, came in at $870 billion, according to Amherst. Net issuance in MBS represents new securities issued less the decline in outstanding securities due to principal paydowns or prepayments.

Spread expansion

Adding to the woes in the agency MBS market are outsized spreads, with the spread between the 30-year fixed mortgage and the benchmark 10-year Treasury hovering around 2.9 percentage points in early December, when historically that spread has ranged between 1 to 2 percentage points. That wide spread has squeezed margins on agency MBS, with 6% coupons at yearend 2023, for example, trading at a fraction of a percentage point above par, down from nearly 10 points above par at the end of the first quarter of last year.

Amherst Chairman and CEO Sean Dobson said the shrinking margins in the agency MBS sector are a byproduct of an over-supply of paper and a greatly reduced investor balance sheets for absorbing the debt. A major purchaser of agency MBS until last year was the Federal Reserve, he explained, which is now allowing up to $35 billion of MBS to roll off its balance sheet each month.

The reduced role of the Fed and other investors in the agency MBS market is acting as a type of governor on rates, preventing them from getting much downward traction. As origination volume increases, and related MBS issuance goes up, so does the supply of MBS for sale in the market — creating downward pressure on prices, assuming buyer demand remains repressed.

Andrew Rhodes, senior director and head of trading at Mortgage Capital Trading, said a loan originator is trying to estimate where their end investor is going to be buying the loan, “so whether it’s the whole loan or the securitization, they are trying to figure out exactly what that price is going to be.” 

“Then the independent mortgage bank (IMB) can originate the loan to that level because that’s how they’re really managing that margin,” he added. “And if all of a sudden, your investor that you thought was going to be spending 103 or 104 [for that loan or MBS] is now at 102, that’s a big hit to that origination volume that you thought was going to be getting a point or two higher in price.”

Dobson said heading into the end of 2023, the securitization market “is structurally impaired right now because the normal sponsor [investor] base is absent.” 

“Some of them are gone forever, and some of them are basically going to have to rebuild capability,” he said. “…This is speculative to a certain extent, but should rates go down, and should a lot of [new MBS] supply get created because of refinancing activity, the market is going to have a really hard time with that. 

“…So, now the question is, what’s the new level that gets it [MBS] to clear when the normal sponsors [investors, such as the Fed] are offline, and that new level is an excess return that’s now something like 50 basis points wider than corporate bonds.”

Amherst projects that in 2023, the pull-back of the Federal Reserve as well as the banking sector from the agency MBS market will result in a combined $425 billion in excess MBS that will need to be absorbed by other investors, such as money managers and foreign investors.

“I think the Fed will not sell MBS but rather is prepared to keep letting the portfolio run off, even if they start cutting rates,” said Richard Koss, chief research officer at mortgage-data analytics firm Recursion.

 “The Central Bank has expressed its interest in reducing its role in the mortgage market and would rather cut rates more if needed, rather than slow down the process of reducing its holdings of MBS,” Koss added.

Bank contraction

In addition to the reduced role of the Fed in the MBS market, the banking industry and other investors also have pulled back from MBS purchases in the wake of financial pressures sparked by rising rates — as well as plans by regulators to tighten bank capital-reserve rules. 

“The problem is … the benchmark of fair [MBS] value was set when the GSEs [government-sponsored enterprises, Fannie and Freddie] could buy [MBS], when the banks could run huge balance sheets, when the REITs [real estate investment trusts] could run big balance sheets, and when the regional banking system wasn’t [impaired],” Dobson said.

Over the past year, a number of large banks have collapsed — among them Silicon Valley Bank, Signature Bank, First Republic Bank and Signature Bank.

“I think there are seven or eight banks total that exited warehouse lending this year, [such as Comerica and Fifth Third Bank],” said Charley Clark, a senior vice president and mortgage warehouse finance executive at EverBank (formerly known as TIAA Bank). The unit does warehouse and MSR lending “and really anything that relates to lending to IMBs [independent mortgage banks],” according to Clark.

The top 15 warehouse lenders as of the end of the third quarter of this year had extended nearly $80 billion in warehouse line commitments, representing about 80% of the market, according to an Inside Mortgage Finance report.

“We were not part of this, but there were definitely funding and liquidity issues [for banks this year], not only just liquidity issues in general, but the cost of funding on the margin,” he added. “So, it was not only hard to find deposits, but they’re expensive. 

“And if you look at something like warehouse lending [to IMBs], the spreads are very tight. If you’re a bank that’s having liquidity and funding issues, what are you going to cut? You’re going to go to the lower spreads to cut, right?”

Other sectors

The narrative is similar for the private-label residential mortgage-backed securities (RMBS) market. 

A yearend forecast report by the Kroll Bond Rating Agency (KBRA) projects that RMBS issuance in 2023 will come in at about $52 billion, down nearly 50% from 2022 and $10 billion below KBRA’s original projection for the year issued in November 2022. KBRA includes prime, nonprime, credit-risk transfer transactions and second-lien offerings in its RMBS analysis.

“[Reduced] mortgage volumes and continued spread volatility in a rising rate environment contributed to a meaningful issuance decline [in 2023],” KBRA’s recent forecast report states.

Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, said for real growth in the housing market to occur, mortgage originations need to increase substantially along with higher securitization volumes, “and it doesn’t seem like that’s highly likely right now.”

“In the case where the Fed cuts [the benchmark rate by] 250 basis points, I’m not sure that’s necessarily a scenario where housing volumes are great and housing prices are strong because that would probably be pretty correlated with a really weak consumer or some recessionary-type outcome,” he added. “And then you have to have wider spreads [due to increased risk], which means the value of creating those mortgages and securitizing them is again hampered.”

If there was one bright spot in the secondary market in 2023, it was the mortgage-servicing rights (MSR) sector, which performs better in rising-rate environments because mortgage prepayment speeds slow to very low levels and returns from parked escrow deposits also rise — both of which help to pump up the value of MSRs. Trading volume in the MSR sector in 2023 is on track to slightly exceed 2022’s $1.1 trillion mark, according to Tom Piercy, chief growth officer at Incenter Capital Advisors(previously Incenter Mortgage Advisors).

“For 2022 [on MSR trading volume], my numbers were right around 1.1 trillion, and I expect 2023 to be slightly greater than that,” Piercy said. “However, I think it [trading volume] was front-end loaded over the first six to seven months of the year … but we continue to see the capital commitments to invest in MSR both from your traditional bank, and nonbank servicers, as well as the MSR investors. 

“And so, I’m still quite bullish on where we are today, as we forecast the capital and the ability to absorb the MSRs in the market.”

“Under the new definition, effective for pools or loan packages submitted on or after Jan. 1, 2024, a ‘high balance loan’ is defined as a single-family forward mortgage loan with an original principal balance (minus the amount of any up-front mortgage insurance premium) that exceeds the [new] limits,” the company said in a statement.

For the contiguous 48 states and the District of Columbia, American Samoa and Puerto Rico, the new maximum loan amounts for a one-unit property is $766,550, while in special areas, including Alaska, Hawaii, Guam or the U.S. Virgin Islands, the one-unit property limit is ​$1,149,825​​. (These figures are net of any financed mortgage insurance premium or guaranty fee.)

High-balance loans are eligible for Ginnie Mae mortgage-backed securities (MBS) under conditions specified in chapter nine of its MBS Guide.

On Tuesday, FHFA announced that the baseline conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac in 2024 will increase to $766,550. That’s up 5.5% compared to the current limit of $726,200. The conforming loan limit increase slowed compared to 2023, reflecting the slower pace of home-price appreciation this year.

The Federal Housing Administration (FHA) also announced changes to its own lending limits for forward and reverse mortgages. The FHA is increasing its “floor” and “ceiling” FHA loan limits in 2024 to $498,257 and $1,149,825, respectively, for a one-unit property.

The FHA-backed Home Equity Conversion Mortgage (HECM) program operates off of a single national limit. For 2024, it is increasing to $1,149,825, or 150% of the conforming loan limits on mortgages backed by Fannie Mae and Freddie Mac.

The combined $140 billion volume considers the given market condition. Still, it can increase if necessary, as the FHFA will continue to monitor the multifamily mortgage market, it says in a recently published fact sheet. To prevent market disruption, FHFA will not reduce the cap if the size of the 2024 market is smaller than initially projected. 

According to the rules, at least 50% of the GSEs multifamily businesses should be directed to mission-driven, affordable housing. However, in 2024, loans classified as supporting workforce housing properties are exempt from the volume cap. 

This loans category, first developed in 2023, preserves rents at affordable levels in multifamily properties, typically without public subsidies. In this case, affordable levels correspond to 80%-120% of the area’s median income, depending on the market. 

“The workforce housing exemption should encourage conventional borrowers to commit to preserving rents at affordable levels for extended periods of time,” FHFA Director Sandra Thompson said in a statement. 

In 2014, the FHFA set a cap on Fannie and Freddie’s conventional (market-rate) multifamily business to ensure liquidity, especially in affordable housing and traditionally underserved segments, without crowding out private capital.

Over the last two years, the cap has been reduced. The level for 2024 is lower than in 2023 ($75 billion for each enterprise) and 2022 ($78 billion) 

“The 2024 multifamily loan caps, coupled with the exemption for workforce housing properties from the caps, will promote the Enterprises’ continued strong commitment to addressing the need for affordable rental housing,” Thompson said. 

The Mortgage Bankers Association (MBA) forecasts that multifamily lending is expected to drop to $285 billion this year – a 41% decline from last year’s total of $480 billion. 

According to the White House, roughly 35% of the U.S. population — or over 44 million households – live in rental housing. Nearly one-third of all rental units nationwide are financed with federally-backed mortgages.