Two top wholesale lenders are up in arms as a result of charges on loans sold to the government-sponsored enterprises (GSEs) arising from a recession-era idea that those loans are riskier.
The lenders, Homepoint and United Wholesale Mortgage, say Fannie Mae and Freddie Mac started tacking on an extra 15 basis point charge for third-party originated, or wholesale, loans in mid-2021. The amount paid by wholesale lenders has now reached at least $279 million, according to an analysis provided by Homepoint, at a time when rising mortgage rates are already shrinking lender profits.
“The original pretext for having a differential on the capital charge is no longer applicable,” said Willie Newman, CEO of Homepoint. “One segment of the business is being treated differently.”
A United Wholesale Mortgage spokesperson said the extra surcharge is part of an “old school 2007/2008 viewpoint that has become outdated.”
The charge is not specifically dictated by the Federal Housing Finance Agency, but the agency’s attitude toward third-party loans from a capital risk standpoint provides the rationale for it. A spokesperson for the FHFA said that the GSEs have discretion to set their own prices, as long as they meet FHFA’s minimum pricing guidelines.
FHFA declined to comment on whether it views wholesale loans as inherently more risky, or provide data to support that stance.
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Fannie Mae said it prices loans to comply with the FHFA’s Enterprise Regulatory Capital Framework, the rule that governs the GSEs capital standards. The rule defines a risk multiplier of 1.1 for wholesale loans that is higher than that for loans originated in other channels. Single-family loans cannot have a total risk multiplier — a composite of many risk factors — exceeding 3.
A Fannie Mae spokesperson said that the GSEs are charged a higher capital charge for wholesale loans.
“In order to stay compliant with the required capital return thresholds, Fannie Mae adjusts pricing for the mix of collateral it receives, with TPO being one of the characteristics for which it prices,” a spokesperson said.
Homepoint said that both GSEs are charging the extra fee. But a spokesperson for Freddie Mac, which is governed by the same rule, said that they do not assess a 15 basis point surcharge on wholesale loans. Freddie Mac declined to provide a rationale for their pricing on wholesale versus other origination channels, and did not answer questions about how they pass on the capital rule’s 1.1 risk multiplier for wholesale loans.
The wholesale lenders argue that data on wholesale loan delinquencies and loan quality dispel the idea that wholesale loans are riskier. That was not the case in the lead up to the Great Recession, when mortgage brokers were faulted for many of the riskiest underwriting practices in the marketplace.
Default rates for nonbank and bank wholesale loans originated from 2005 to 2008 were 14.9% and 16.3%, a Homepoint analysis found. Defaults on loans that were not originated by third parties meanwhile never topped 13%.
An analysis of defaults in recent years provided by Homepoint, which the company has used to explain the issue to its own mortgage brokers, shows that default rates for loans originated from 2018 to 2019 have hovered around 0.2% for all channels.
“Specifically, the data on delinquencies and the quality of loans through the wholesale channel supports that brokers’ loans are not only equal to retail, but in many cases better,” a UWM spokesperson said.
One differentiator both Homepoint and UWM drew attention to is the wholesale channel’s performance with minority borrowers. They are hoping it will provide rationale to revise the capital rule, especially given FHFA’s focus on advancing equity in mortgage finance.
The top 10 wholesale lenders account for fewer conventional conforming 30-year mortgage borrowers than the top 10 non-bank retail lenders do, making only 725,000 loans versus 1.12 million by nonbank retailers. But more than 25% of those borrowers are minorities, versus just 16% for the retailers.
So, Homepoint and UWM argue that the surcharge is not just impacting their bottom lines — which it most certainly is — but is also penalizing the borrowers who the GSEs must serve. If the FHFA wants to further equity in the mortgage market, it doesn’t make sense to penalize the wholesale channel, UWM and Homepoint contend.
“The most concerning part of this surcharge is its impact on affordable purchase lending which is where brokers and wholesale lenders do significant business,” a spokesperson for UWM said. “We fully expect FHFA and all industry parties to treat wholesale and retail loans equal in the near future.”
