For twelve years now Fannie Mae and Freddie Mac have been under U.S. Government conservatorship, overseen by the Federal Housing Finance Agency, or FHFA which means that the taxpayer is “on the hook.” Orion’s brokers have kept a watchful eye on developments with Freddie and Fannie for years, given so much product flows through the two of them, but things may begin to change if the election changes who is in power.

The current Director of the FHFA, Mark Calabria, wants to recapitalize and release the GSEs. In order to do that he must direct amending the preferred stock agreement to resolve the government ownership interest. All of the policy, pricing, and underwriting decisions made while in conservatorship… will the “new” entities keep them?

Calabria wants to change capital rule, as he believes the footprint is larger than where it should be, and wants to “level the playing field” with big banks. Should the capital match levels that existed in 2008? Our brokers know that the government currently provides the net worth backstop for Freddie and Fannie, and it needs to be reduced to reduce taxpayer exposure. The taxpayer has owned GSEs since 2008, and we should receive something for giving up our stake. Fortunately, the dividends that have been paid are far in excess of the 10% coupon originally sought.

The FHFA has put the rule out for comment, will assess comments and feedback, and will issue a final rule, probably by year end. Orion and our brokers will watch to see how the capital situation impacts gfee pricing and other LLPAs.

Each currently have about $30 billion of retained earnings, and “expert” analysts say they will need to raise about $260 billion, plus some cushion. That is a long way off, as in several years, so there is a discussion of moving them out of conservatorship prior to hitting that.

Our brokers, and future clients, wonder what the cost will be. What will a private Freddie and Fannie do the cost of mortgage money? Many predict a 25-35 basis point increase, but estimating it is difficult since it will be very dependent on products, volumes, pricing, and so on. Orion’s management believes that the refinance hit (LLPA) delayed until December 1, and poorly rolled out, probably will not be reduced or delayed further.

If the Democrats win election, the odds are is that Calabria continues down his current path. If the Republicans win, he certainly will. So Orion expect a worsening in conventional conforming pricing, other things being equal, 2021.