(Bloomberg)-Fanny Mae and Freddie Mac make it more expensive for lenders to offer mortgages at their villas. This could give more life to a dangerous corner of the bond market that has fallen dormant after the financial crisis.

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Starting April 1, the two government-backed companies will begin to charge more to guarantee villas and especially large mortgage loans. These guarantees help lenders like banks to combine loans into bonds for easy buying and selling.

As guarantees become more expensive, some lenders will stop paying them and instead package their mortgages into higher risk bonds known as their own branded mortgage-backed securities. Say you’re expecting it. The market for these bonds peaked in 2005 and 2006, when the housing bubble was still inflated, and is now showing signs of revival again.

The revival of the bond market is coming when the housing market may be over-turning again. Median home prices in February were around $ 357,300, up about 34% from January 2020, according to data from the National Association of Real Estate Agents compiled by Bloomberg.

The Federal Reserve Bank of Dallas said in a blog post this week that home prices could be “freed from fundamentals.” However, home sales have begun to cool with the rate of increase in the Federal Reserve, and mortgage home purchase applications have declined since the beginning of this year.

In late February, Nikolai Stoichev, head of mortgage-backed securities derivatives at Ellington Management Group, said higher fees could lead to an additional $ 50 billion in private label transactions this year. Said there is.

Increased charge

FHFA, which regulates Fannie Mae and Freddie Mac, said in January that GSE guarantee fees for high-value loans would increase by 0.25% to 0.75% from April, depending on the size of the mortgage relative to the mortgage’s home value. There are exceptions to some first-time homebuyers. For a second mortgage, the prepaid fee will increase between 1.125% and 3.875%.

Fannie Mae and Freddie Mac consider large loans to exceed the $ 647,200 limit for single-family homes in most parts of the United States, but $ 970,800, which is the limit for high-cost areas such as New York City. Is below.

The two entities previously limited the villa’s warranty. In January 2021, the last few days of the Trump administration, the US Treasury said the second house and investment property had a 12-month period.

It represents a big reduction. These mortgages previously accounted for nearly 15% of a company’s single-family home business as the pandemic increased demand for villa withdrawals. According to Redfin’s Second Home Demand Index, second-house demand increased 91% in January 2021 from levels a year ago.

Absorb issuance

The home-branded mortgage bond market has proven to be able to absorb the growing demand of lenders to sell bonds there.

Phil Rasori, Chief Operating Officer of financial technology company Agile Trading Technologies, said of investment real estate mortgages, “Last year there was a dispute over setting up our own branded facility as a loan.”

According to the Securities and Financial Markets Association, an industry group, debt issuance surged to about $ 272 billion from last year, up 45% year-on-year, breaking post-crisis records. For most of the decade after the burst of the housing bubble, issuance was less than $ 100 billion, a significant drop from over $ 1.2 trillion in 2005 and 2006.

Almost 10% of the 2021 own-brand RMBS market was backed by investor loan collateral, according to researchers at the Structured Finance Association, a trading group citing Deutsche Bank data.

Nevertheless, nine months after the cap was set by the Trump administration, the cap was suspended by the current administration’s Federal Housing Finance Agency and the Treasury in September 2021. This has reduced the demand from lenders to sell their own brand of mortgage bonds, which is now expected to rise again.

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