U.S. Fee Hikes on Vacation-Home Loans to Boost Long-Quiet Private MBS Market

(Bloomberg) — Fannie Mae and Freddie Mac are making it more expensive for lenders to offer mortgages on vacation homes, a move that could give additional life to a risky corner of the bond market that fell dormant after the financial crisis.

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Starting April 1, the two government-supported companies will begin charging more to guarantee loans for vacation homes as well as mortgages that are particularly large. Those guarantees help lenders like banks bundle the loans into bonds that can be readily sold and traded.

With the guarantees becoming more expensive, some lenders say they expect to stop paying for them, and to instead package the home loans into riskier bonds known as private-label mortgage backed securities. The market for selling those bonds peaked in 2005 and 2006, when the housing bubble was still inflated, and is now showing signs of reviving again.

The return of that bond market is coming at a time when the housing market may be veering into excess again. The median home price in February was about $357,300, up about 34% from January 2020, according to National Association of Realtors data compiled by Bloomberg.

The Dallas Federal Reserve bank said in a blog post this week that home prices are potentially becoming “unhinged from fundamentals.” But with the Federal Reserve lifting rates, housing sales are also starting to cool off, and applications for mortgages to purchase residences have been declining from earlier this year.

The rising fees might translate to as much as $50 billion of additional loans going into private label deals this year, said Nikolay Stoytchev, head of mortgage backed security derivatives at Ellington Management Group, in late February.

Rising Fees

The FHFA, which regulates Fannie Mae and Freddie Mac, said in January that starting in April, GSE guarantee fees for high balance loans will increase by between 0.25% and 0.75%, depending on how big the mortgage is relative to the value of the home, although there is an exception for some first-time homebuyers. For second-home loans, upfront fees will increase by between 1.125% and 3.875%.

Fannie Mae and Freddie Mac consider large loans to be those exceeding $647,200 for a single-unit house, the limit in most parts of the U.S., but underneath $970,800, the limit for high-costs areas such as New York City.

The two entities have limited their guarantees for vacation homes before: In January 2021, during the last days of the Trump administration, the U.S. Treasury announced that second homes and investment properties could only represent 7% of single-family guarantees for the companies over a 12 month period.

That represented a huge cut. These mortgages previously accounted for closer to around 15% of the companies’ single-family business, because the pandemic had boosted demand for vacation homes to retreat to. According to Redfin’s Second Home Demand Index, demand for second homes was up 91% in January 2021 from its level one year before.

Absorbing Issuance

The private label mortgage bond market proved able to absorb lenders’ growing demand to sell bonds there.

“There was a scramble last year to get private-label facilities set up for the loans,” said Phil Rasori, chief operating officer at financial technology company Agile Trading Technologies, referring to mortgages for investment properties.

Issuance of the debt jumped to about $272 billion last year, up 45% from the year before and a post-crisis record, according to the Securities Industry and Financial Markets Association, a trade group. For most of the decade after the housing bubble collapsed, issuance was less than $100 billion, a huge drop from levels that topped $1.2 trillion in 2005 and 2006.

Nearly 10% of the private-label RMBS market in 2021 was backed by investor-loan collateral, according to researchers at the Structured Finance Association, a trade group, citing Deutsche Bank data.

Still, nine months after the caps were put in the place by the Trump administration, in September 2021, they were suspended by the current administration’s Federal Housing Finance Agency and Treasury. That cut into demand from lenders to sell private-label mortgage bonds, which is now due to rise again.