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The Federal Reserve's latest semiannual financial stability report — a survey of financial professionals — found inflation and high interest rates to be respondents' top concern. But policy uncertainty — a lack of clarity about the direction of foreign and domestic policy — was the No. 2 concern.Bloomberg News WASHINGTON — Inflation and uncertainty surrounding the direction of federal policy on trade, spending and other issues are banks' top financial stability concerns, the Federal Reserve Board said in a report released Friday.For its semiannual report on financial stability, the Fed surveyed a range of financial professionals — including broker-dealers, investment fund managers, research and advisory professionals as well as academics — about the top issues facing the financial system. Policy uncertainty emerged as a major new source of anxiety for industry experts — it was cited by 60% of respondents, up from the just 24% of respondents who cited it as a top concern in the Fed's last survey in October 2023. Since 2019, the Fed has issued two reports on financial stability per year, usually releasing one in the spring and another in the fall.Persistent inflation and high interest rates remained the top concern across the board, with 72% of respondents listing it as their primary concern — the same percentage as in the October report. The report indicated that interest rates may remain elevated above current market expectations for an extended period and that persistent inflation could prompt a more stringent monetary policy, causing increased volatility in financial markets and adjustments in asset valuations. But the rise of policy uncertainty — including unpredictability stemming from fluctuating trade policies, influenced by geopolitical tensions such as the conflict in the Middle East and Russia's war against Ukraine that has lasted more than two years — was an unexpected source of market disruption for many survey respondents. Respondents also flagged the upcoming U.S. elections in November as a source of stress."Further escalation of geopolitical tensions or policy uncertainty could reduce economic activity, boost inflation, and heighten volatility in financial markets," the report said. "The global financial system could be affected by a pullback from risk-taking, declines in asset prices, and losses for exposed U.S. and foreign businesses and investors."Concerns about the credit quality of commercial real estate — which was the No. 2 concern cited in the October report — was cited as a top concern among 56% of the survey's respondents. But that fell from 72% in the October report. The Fed noted that prices across all sectors of CRE continued to decline in the second half of 2023, and the report makes clear the full impact of CRE price drops have yet to be reflected in the data."These transaction-based price measures likely do not yet fully reflect the deterioration in CRE market prices because, rather than realizing losses, many owners wait for more favorable conditions to put their properties on the market," noted the report. "Capitalization rates at the time of property purchase, which measure the annual income of commercial properties relative to their prices, moved modestly higher but remained at historically low levels, suggesting that prices remain high relative to fundamentals."Banking sector instability continued to feature prominently despite the report noting high levels of liquidity and low funding risks in the sector since the October report.While the Fed's emergency lending facility, the Bank Term Funding Program, ceased operations on March 11, the report noted the BTFP continues to reduce liquidity pressures for depositories. The report said mostly small institutions with under $10 billion of assets — representing 95% of beneficiaries — benefited from the program.

Jenny Vipperman (left), president and chief executive of ORNL Federal Credit Union, and Mike de Vere (right), CEO of Zest AI. “The reason that we exist as a not-for-profit cooperative, is that our intention is to serve the underserved and what better way to serve the underserved than to be able to [use] LuLu … and figure out what can we do differently to bring everybody in and then still do it in a safe and sound way,” Vipperman said. Jenny Vipperman, president and chief executive of ORNL Federal Credit Union in Oak Ridge, Tennessee, is partnering with the Burbank, California-based lending software firm Zest AI to pilot an artificial intelligence-powered tool for ensuring that fair lending is done right.Zest AI formally debuted its large language lending intelligence bot LuLu in late February. The conversational AI assistant, which is kept separate from underwriting models as per regulatory requirements, is first trained using roughly 15 years' worth of customer queries recorded by the fintech as well as public sources of data such as National Credit Union Administration quarterly call report data and Home Mortgage Disclosure Act filings.From there, LuLu is tailored to each institution, including the $3.7 billion-asset ORNL, through sets of business data on loan portfolios and applications, as well as internal reports and documents that are unique to each organization. Users conversing with the bot can ask questions about their institution's loan performance compared to others in a similar asset class, in addition to questions about how they can improve automation or fair lending compliance.Vipperman said that she hopes to use LuLu in conjunction with Zest AI's underwriting models to "increase approvals across protected classes while not taking anything away from non protected classes" and continually check in on "what would have happened if we made different decisions" while asking "could we have brought more consumers in and grown even more with lower risk," amid other questions."The reason that we exist as a not-for-profit cooperative, is that our intention is to serve the underserved and what better way to serve the underserved than to be able to [use] LuLu … and figure out what can we do differently to bring everybody in and then still do it in a safe and sound way," Vipperman said. The credit union's iteration of the gen AI tool is set to go live this month. A visual of LuLu's dashboard, where current and past conversations are stored for reference.Zest AI Use of gen AI tools is growing across the financial services space. A survey released last month by Arizent, which publishes American Banker, found that roughly 55% of global and national banks with more than $100 billion of assets are implementing generative AI in some capacity. Credit unions and regional banks with assets between $10 billion and $100 billion recorded 40% implementation, and community banks with less than $10 billion of assets responded with 28%.More specific use cases involve Citi's rollout of the GitHub Copilot to developers and the $733 million-asset Grasshopper Bank in New York, which instituted an AI-based assistant for its compliance team handling tasks necessary under the Bank Secrecy Act. Credit Karma, which was acquired by Intuit in 2020, implemented its financial assistant earlier this year.Jerry Haywood, CEO of the Sandnes, Norway-based conversational AI provider boost.ai, said customer experience, marketing and customer assessment for credit-based decisions are the three key areas where gen AI is being tested, but understanding how to apply it in individual use cases means knowing how much involvement is needed."While gen AI is the newest tech on the block, there are still many use cases where traditional, pre-written flows are the right tool for the job, and may even be a more practical solution. … For example, any process that needs to be 100% the same in every case, such as the transfer of funds between accounts, should be handled by a pre-written flow," Haywood said. The fintech debuted its newest iteration of AI-powered assistants earlier this week.Not all financial institutions are keen on rushing to adopt new technologies, however.Roughly 15% of respondents to the aforementioned Arizent research have prohibited their employees from using any form of gen AI for work-related tasks, while a further 46% either restrict its use to specific functions and roles or are considering putting limiting policies in place. Many hold back due to concerns that technology that can produce new content can have unforeseen results."Unlike deterministic tools, generative AI produces outputs that aren't always foreseeable," said Lei Wang, chief technology officer of Torpago, a card and spend management fintech. "This lack of control over the output becomes especially concerning when these tools are directly interfacing with end-users."Thorough testing is important when developing and implementing these models to minimize the possibility of hallucinations — the creation of false information or results — and biases unintentionally included in the training data, said Jay Venkateswaran, business unit head of banking and financial services for the Mumbai, Maharashtra-based global WNS.Regulatory concerns are also a worry. Following the White House's executive order on AI released last November, developers of AI models like Zest and the financial institutions they partner with have been cautiously moving ahead when implementing products such as underwriting algorithms, conversational bots, employee co-pilots and more — all to avoid any potential missteps with regulators.Banking officials with the Federal Deposit Insurance Corp. that are exploring the risks of overreliance on AI maintain that existing laws and tools are capable of preventing any vulnerabilities from impacting consumers or the financial system at large. But others with the Consumer Financial Protection Bureau, which has continued its campaign to root out instances of bias in algorithmic-based lending and other transparency issues, remain skeptical.Another hurdle to gen AI adoption in the  banking industry is the fear among entry-level employees that AI will take over their tasks, and thus render their roles redundant. Executives are working to assuage these doubts by including staffers who would be most affected by the addition of AI tools in the testing and rollout of any new products.There is still work to be done where end users are concerned, as institutions "are understandably being prudent while savvy fintechs are fast at work to roll out customer-facing generative AI tools," said Dylan Lerner, senior digital banking analyst at Javelin Strategy & Research."The last thing financial institutions need right now is a misunderstood element embedded in their tech stack," Lerner said.

Ginnie Mae President Alanna McCargo announced plans to retire Friday, calling it a "deeply personal decision to return to private life."Her impending departure will end the tenure of Ginnie's first woman president, who brought stability to the role after a period in which there hadn't been a Senate-confirmed holder in almost five years.McCargo stabilized the agency at a crucial time as she helped navigate it through both a pandemic and subsequent dramatic interest-rate cycle change that put strain on some mortgage companies that were Ginnie's counterparties.Ginnie helped stand up an emergency liquidity facility during the pandemic and also later coordinated with the Federal Housing Finance Agency in the development of a series of modernized counterparty requirements during her time there.While Ginnie drew some criticism for having to seize servicing from one of those counterparties in the specialized reverse mortgage market, where there are limited players, it appears to have otherwise minimized issuer failures in a stressed environment.A nonbank risk-based capital rule proposed under McCargo's watch drew some industry criticism but relations with mortgage companies became more conciliatory after Ginnie extended its deadline and promised to work with issuers.During McCargo's time at Ginnie, the agency took some steps in the wake of its experience with the Reverse Mortgage Funding bankruptcy to reduce liquidity strain in that sector.It also has drawn up policies to address more recent risks that have become apparent around cybersecurity concerns and managed to keep its funding intact amid a federal budget crisis, sustaining liquidity for a massive government-guaranteed housing market.Ginnie guarantees securitizations of mortgages backed at the loan-level by other government agencies like the Federal Housing Administration and the Department of Veterans Affairs, and it helps fund a significant number of loans made to first-time home buyers."The past 3.5 years in public service with the Biden-Harris Administration has been the most important and fulfilling work of my 25-year career in housing finance," said McCargo, who plans to leave the agency May 3."I am deeply grateful for the opportunity to serve my country and advance a bold housing agenda across the globe," she added, alluding to the international investor base for the securities Ginnie guarantees. Ginnie increased outreach to Latin America during her tenure.McCargo's planned departure will come not long after that of Marcia Fudge, the Department of Housing and Urban Development's secretary, who announced last month she would step down. Ginnie is an arm of HUD. Adrianne Todman, previously a deputy secretary at HUD, is now serving in Fudge's former role on an acting basis.Todman called McCargo, who brought expertise in areas like small-loan funding challenges and servicing from her previous role at the Urban Institute to Ginnie, "a zealous advocate for housing affordability and ensuring a more equitable housing finance system."As president of Ginnie Mae, Alanna has helped expand Ginnie Mae's reach in serving historically underserved communities and has been a champion for advancing market-driven initiatives that support mortgage programs across the government," Todman added.Sam Valverde, principal executive vice president at Ginnie, will take on McCargo's role on an acting basis after she leaves. Laura Kenney, Ginnie's senior advisor for strategic operations and interim chief operating officer, also will take on some of McCargo's former responsibilities.

The Structured Finance Association is questioning whether a proposed Freddie Mac pilot involving certain home loans with subordinate liens is within the bounds of its charter."It is quite unclear what role the government-sponsored enterprises have in funding these mortgage products, or how that fits into Freddie Mac's overall government-chartered mission objective," said Michael Bright, the association's CEO, in a press release.SFA characterized the pilot as "unnecessary government intervention," saying there is no need for Freddie to run a new test of certain closed-end second lien purchases given that portion of the home-equity loan market is sufficiently served without public involvement."In the current market, closed-end second mortgages have been, and continue to be successfully originated and funded by private capital," said Bright, who previously served at Ginnie Mae's chief operating officer and interim president between July 2017 and January 2019.(Ginnie Mae is a government agency that guarantees securitized mortgages backed at the loan level by other public entities. Ginnie's market is separate from Freddie Mac's quasi-public one but the two agencies do coordinate some policies, adjusted for their different structures.)Further comment may be forthcoming from the Bright's group, which is convening a task force to study the issue. SFA plans to loop in Freddie's regulator, the Federal Housing Finance Agency, on the results.The FHFA announced the pilot this week under the auspices of its product preapproval rule and will be collecting comments over the course of the next 30 days. It will decide whether to move forward with it in the next 30 days after that.Freddie's test of closed-end second lien purchases would be done only in cases where it had also bought the primary mortgage, and initially would involve a subset of that group.One goal of the pilot is to give borrowers who have trouble cost-effectively tapping their equity through a cash-out refinance a more affordable way of doing it. Below-market-rate first liens many borrowers hold currently make cash-outs unattractive to them.Freddie engaged in a nonmaterial amount of second lien purchases decades ago, suggesting that there's some precedent for the move.The cash-out mortgage complications that exist in the current market suggest the concept's potential could be greater now if fully implemented across both Freddie and its competitor, Fannie Mae. A 1990s Fannie filing shows it engaged in second lien purchases in the past.Some researchers have described Freddie's purchases as more likely to augment the broader home equity lending market than detract from it, at least from the perspective of certain neighboring segments where direct competition would be less likely to occur."If the GSEs enter this market, we would expect them to grow the market as opposed to taking volume away from banks," Keefe, Bruyette & Woods analysts who cover public mortgage companies said in a recent report.(Banks are more likely to offer home equity lines of credit rather than closed-end second clients because the former better match-fund their deposits, but the two products do compete for consumers' attention to some degree.)Similarly, Freddie's pilot is unlikely to pose much of a threat to equity-sharing products, according to the KBW report."We don't think this product will compete with home equity investments," they said, referring to products where investors can receive a portion of the consumer's house price appreciation.The availability of a new loan outlet for certain closed-end seconds also could be positive for some publicly-traded nonbank mortgage lenders that aren't interested in buying the product and instead want to sell it, the analysts added."However, given the relatively small loan sizes, we do not expect this to move the needle in terms of earnings," the KBW researchers concluded.

The hoped-for improvement in origination volume at Hilltop Holdings' mortgage business did not materialize in the first quarter, although PrimeLending did see improvement in its gain-on-sale margin.There are signs of optimism for a turnaround, although in the next few quarters the mortgage business will remain challenged, Jeremy Ford, Hilltop Holdings' president and CEO said on the company's first quarter earnings call.This increase did not keep the unit out of the red, as it lost $16.45 million on a pretax basis during the first quarter, compared with a $15.9 million fourth quarter loss and a loss of $24.1 million on a year-over-year basis.Ford blamed the current period loss on low housing inventory, escalating home prices and persistently higher mortgage rates. In addition, "operating results were negatively impacted by a $7 million valuation adjustment on the [mortgage servicing rights] asset," he continued. "We are seeing that the cost-cutting measures implemented during 2022 and 2023 are making a positive impact as non-variable compensation has decreased by $6 million or 17% since the first quarter of 2023."Approximately $5 million of the MSR valuation hit is due to a letter of intent to sell all of its conventional servicing rights, William Furr, executive vice president and chief financial officer said."As we've noted in the past, the MSR asset is not a strategic asset for Hilltop," Furr said. "And while we may choose to retain MSRs at times through the cycle, our long-term view remains that we will maintain a small MSR asset, sufficient to support the sale of certain product to PrimeLending and that we will execute bulk sales when we deem appropriate to limit our overall exposure on the balance sheet."During the first quarter, PrimeLending produced origination volume of $1.68 billion, compared with $1.82 billion in the fourth quarter and $1.73 billion in the prior year period.But over that same time frame, gain-on-sale margins grew to 216 basis points, versus 189 basis points one quarter ago and 186 basis points in the first quarter of 2023.The trade-off for the higher GOS is lower mortgage loan origination fees as fewer clients bought down the rate. They fell 158 basis points from 181 basis points in the fourth quarter and 166 basis points one year ago.Borrowers are making what Furr called "kind of real-time decisions" about buying down the interest rate, which generates more origination fees. On the other hand, Hilltop is able to take that loan to the secondary market and garner a higher gain-on-sale."So we're looking at it, on an aggregate revenue basis of about 375 basis points is where we've been here recently," Furr said. "One of the revenue components moving higher, while the other necessarily almost offsets it dollar-for-dollar, I think just puts us in a similar spot."Hilltop Holdings ended up with net income of $27.7 million for the quarter, down from $28.7 million for the fourth quarter but improved from $25.8 million in the first quarter of 2023. PrimeLending is a subsidiary of its depository, PlainsCapital Bank, and Hilltop also owns two broker/dealer businesses.

Servicers of Ginnie Mae mortgages have been under the regulatory microscope, with concerns about their liquidity attracting significant attention, including from the Financial Stability Oversight Council. Yet the discussion overlooks how the federal government itself directly contributes to this liquidity risk. One simple solution is for the government to remove the barriers it has created, to allow private capital to provide the needed liquidity.Servicers play a pivotal role in the intricate web of mortgage financing, far beyond mere payment collection. For mortgages pooled in Ginnie Mae or GSE mortgage-backed securities, servicers must advance missed mortgage payments to MBS holders and pay taxing authorities and hazard insurers if escrow funds are short. If a borrower doesn't make these payments, servicers must maintain sufficient liquidity (cash) to make these payments. Such servicing advances are ultimately reimbursed by the GSEs or by the government loan guarantor, such as the Federal Housing Administration, the Department of Veterans Affairs or the Department of Agriculture.Periods of economic stress, which can cause income disruption and disproportionately affect borrowers under the government programs financed by Ginnie Mae, can cause liquidity strain for Ginnie Mae servicers at exactly the time borrowers are most reliant on these companies for assistance to help keep them in their homes. Moreover, the combination of higher delinquency rates, longer time frames for servicers to advance funds, and slower and less predictable reimbursement of servicing advances mean that Ginnie Mae MBS pose greater liquidity risk for servicers than those in GSE MBS.These key differences between Ginnie Mae and GSE servicing have been exacerbated as public policy interventions have extended delinquency resolution time frames, in turn increasing the need for servicer advances. While these changes are intended to benefit borrowers, the effect is that the liquidity needed to make servicing advances on behalf of delinquent borrowers is greater now than in past decades.Long-term solutions to reducing servicer liquidity risk require consideration of how the government programs treat mortgage delinquency. Today, borrowers are given many more months (or years) to resolve their delinquency than in the past. Long-term reforms could put FHA, VA and USDA on par with the conventional loan market and reduce the extent to which mortgage servicers must finance these extensive borrower recovery (or failure) timelines.But, such structural reforms to the government loss mitigation programs would require a long-term effort and the market needs immediate approaches to address the cash flow mismatch that has put substantially greater liquidity pressures on some servicers. Facilitating greater private financing is a more efficient route to improving market liquidity. Specifically, Ginnie Mae today can update its guidance and supplement its contracts in a way that would make it easier for private capital to play a greater role in financing servicing operations.Independent mortgage banks, or IMBs, that service Ginnie Mae loans face unique liquidity challenges, yet efforts to secure private sector financing are stymied because of the manner in which Ginnie Mae asserts its ownership interest in servicing advance reimbursements in the event a servicer fails. This means that FHA, VA and USDA reimbursements that would normally repay the loan servicer for the advances would instead be paid to and retained by Ginnie Mae. As a result, banks and other potential sources of private capital limit or avoid what they consider unsecured lending to IMBs for servicing advances, and servicers must find other ways to finance these advances. In certain market environments this is difficult and could cause servicer failures. The irony, of course, is that these advances simply intermediate between two federal obligations — the Ginnie guarantee to investors and the FHA, VA and USDA guarantee to the lender.Commercial banks and other sources of private capital would more willingly lend against government servicing advances that the government has promised to repay if they had some assurance that Ginnie Mae would recognize their interest in the event Ginnie Mae became the owner of the servicing rights after a servicer failure. But Ginnie Mae has historically been unwilling to do this.Ginnie Mae's resistance stems from the statutory text that servicing assets acquired through default are the "absolute property" of Ginnie Mae, subject only to the rights of the security holders — hence Ginnie's reluctance to agree that interests of advance financiers should be recognized and protected. But Ginnie Mae's core function — guaranteeing that security holders will receive the payments due them — is relevant here. For payments that were appropriately advanced to the security holder, there is no public purpose served by Ginnie Mae impounding the reimbursements of these advances (in the case of the servicer's failure) and forcing servicing liquidity providers to take losses.This interpretation of the "absolute property" clause has severe consequences: It shuts out banks or others from an increasingly important financing function that they are well suited to provide (and do in other segments of the market) and pushes servicers into higher cost financing options. Ginnie Mae's absolute property rights can be preserved while also giving private funders the assurances they need to provide advance financing of government-backed loans.There is no statutory or regulatory text that explicitly prohibits Ginnie Mae from creating an agreement for advance financing that would protect the interests of liquidity providers if a Ginnie Mae issuer defaults. Ginnie Mae has the legal authority and discretion to update its guidance to fully recognize and preserve Ginnie Mae's absolute rights to the servicing acquired via default while formally memorializing that advance reimbursements Ginnie Mae receives from government insurance claims, borrower cures or loan payoffs will be passed through to the advance financier. Ginnie Mae's absolute rights, and the agency's ability to choose to pass through advance reimbursements, are not in conflict. Quite the opposite — strengthening private financing of Ginnie loans enhances the value of the Ginnie servicing asset — a clear benefit to Ginnie Mae and to borrowers.Formally establishing this arrangement would benefit Ginnie Mae. Enhancing private capital financing of servicer advances directly supports a core servicing function. In its absence, servicers have come to rely on borrowing against the value of the servicing rights, a more volatile asset for liquidity providers that results in worse financing terms for the servicer. Ginnie Mae itself, given the lack of a private market alternative, has had to provide "last resort" financing via its PTAP program, which ultimately relies on taxpayer support.Facilitating mortgage liquidity with private capital is one of Ginnie Mae's chartered purposes, and no one benefits from banks and private liquidity providers sitting on the sidelines. As mortgage originators and servicers implement the more stringent agency financial requirements of recent years, policymakers should turn their attention to additional methods to improve the resilience of the housing finance system. Finding ways for private capital to play a larger role, and re-examining structural deficiencies in the government programs, are good places to start.

Mortgage industry stakeholders may coalesce around the notion that climate risk is a timely issue, but it's not something that greatly concerns most working in home finance — yet. Panelists speaking at AmeriCatalyst's conference "Going to Extremes" Thursday said the impact of extreme weather on the housing market has started to weigh on independent mortgage bankers, but the issue for now is "manageable."  "Five years ago when we would bring a group of lenders together, climate wasn't really a concern… but this year if you get a group of lenders together [climate risk] always comes up," said Mike Fratantoni, chief economist at the Mortgage Bankers Association. "That said, I wouldn't characterize it as a crisis. I still think it's manageable, but definitely a top concern."From a lender and servicer perspective, Don White, senior managing director and chief risk officer at PennyMac Financial, said climate change is seen as a "priceable and manageable risk." "If the insurance industry were to collapse it would become much more of a crisis for lenders...but as of right now, it seems like it's managed," he said.White added that equity investors have started inquiring as to how PennyMac is managing climate risk, but the line of questioning thus far has not been serious."We'll occasionally get a question on it. We have been taking steps to quantify and clarify this risk and they seem satisfied with that answer," the PennyMac executive said. "They don't dig deeper, they just want to know that we're paying attention." Sam Khater, chief economist at Freddie Mac, also said the impact of extreme weather events on the housing industry is an "urgent, but manageable risk.""I think of it as a nonlinear out of equilibrium phenomenon," he said. "This is why we have to get out in front of it, but I think we do have the tools to manage it, we just need to keep pushing."Not all panelists agreed. Ted Tozer, former president at Ginnie Mae, said this is "the beginning of an issue that's going to continue to get more dramatic and have implications that could be far reaching through the mortgage industry from servicers to lenders to investors…it will all come home to roost."Out of all extreme weather patterns, almost all of the six panelists, which also included former Director of the Federal Housing Finance Agency Mark Calabria, expressed worry over how drought may impact the housing market. "We need to talk a lot more about places that don't have enough water, about drought risk," said Khater. "Some of the climate research suggests this is the biggest danger because that influences productivity and fertility of the land." PennyMac's White agreed, noting the difficulty of figuring out how a drought will affect a certain area. "If we have a ten year drought in California, it's really hard to model what that's going to look like in terms of home prices and the economy in general," White said. "I'll trade the acute risk for the chronic risk any day."

Facing an audience of U.S. senators, a leading regulator said changes to Federal Home Loan Bank policies, particularly regarding the amount institutions need to commit to affordable housing, is in order. Leaders from the Federal Housing Finance Agency and Department of Housing and Urban Development touched on a range of concerns from property insurance to a title insurance waiver pilot on Thursday. But the current role of Federal Home Loan banks in today's housing market came up on multiple occasions during the meeting of the Senate Committee on Banking, Housing and Urban Affairs."They're serving all of the states in the United States, and they could do a better job in providing housing development and profitability, affordable housing and community development," FHFA Director Sandra Thompson said about the FHLBs. With home affordability and financial industry stability both at top of mind for consumers, bank stakeholders and the White House alike this year, the FHLB system has found itself under increased scrutiny over the past several months from policymakers and critics, who claim it is failing to meet the needs for which it was originally created. Thompson's latest comments underscore some of the views she expressed last year following an extensive review of the system.At the center of any potential policy change is an increase in the required threshold each FHLB needs to provide toward affordable housing programs. Currently, the 11 institutions making up the system are expected to allot 10% of net income toward such initiatives."They're all well capitalized, and they can well afford to provide at least another 10% to help with this housing crisis that we're having throughout this country," Thompson said. Lax oversight of FHLB member institutions also became a frequent criticism lobbed against the system after the regional bank crisis of 2023. While banks are required to demonstrate residential mortgages make up 10% of their assets in order to join an FHLB, they may adjust allocations once they become members, while continuing to take advantage of system financing, Sen. Elizabeth Warren pointed out. Before Silicon Valley Bank, Signature Bank and First Republic Bank failed last year, each increased their levels of borrowing from the Federal Home Loan Bank System by more than one-third before shutting down, the Government Accountability Office reported last week."We are going to promulgate rulemaking sometime this year to talk about membership — one, to define what the role is of membership, and to also to ask questions about what that threshold should be, because you will have a situation like the one of the three bank failures where you start out with the 10% and meet the requirement. And then the bank's business model changes and there's no ongoing checks" Thompson responded. Thompson also said the system needed to be expanded to include more community development financial institutions, or CDFIs, due to the benefits they brought to underserved and low-to-moderate income areas."One of our regulatory asks is to make sure that CDFIs have the same benefits as other small institutions like community banks, so they can continue to build and provide affordable housing in their communities," she said. While member banks are able to commit collateral, CDFIs are not able to pledge the same type, making many ineligible. "We wanted to make sure there was parity because we're talking about small institutions and small members," Thompson added.At other points during the hearing, both FHFA and HUD addressed ongoing concerns about property insurers' "outrageous" rate increases or withdrawals from markets and the risk posed to homeowners and the financing system. Both agencies said they were working with federal agencies and state authorities for possible solutions."As soon as this week, you will be hearing HUD announced some of the things that we can do. And there's a whole body of work that we'll be rolling out, including engaging with the insurance industry," said the department's Acting Secretary Adrianne Todman.The title insurance waiver pilot for selected refinances proposed by the Biden Administration also came under criticism, particularly surrounding the transparency of the announcement and its effect on affordability. Last week, Fannie Mae said it would put out a call to vendors for possible title insurance alternatives."We are still in the process of searching for a vendor to help digitize and try to figure out how they can access the title records," Director Thompson said.

The delinquency rates for securitized non-qualified mortgages are on the rise as these loans continue to season but they remain within an acceptable range, according to Morningstar DBRS.Meanwhile, new issuances had their best quarter since the second quarter of 2022 as primary-to-secondary market spreads tightened even though mortgage rates increased.As of March 25, the delinquency rate for non-QM MBS was 5.09%, up from 4.88% one month ago, 4.81% at the end of last year and 3.75% for the first quarter of 2023."Non-QM RMBS structures across the sector held relatively secure as virtually all outstanding transactions continued to pass their deal performance tests," said the report, whose lead author was Mark Fontanilla, senior vice president. "Meanwhile, collateral losses at the deal level remained modest, which helped improve credit enhancements, albeit at a slower pace than when speeds were much higher in 2022."This compares with a total RMBS delinquency rate of 1.52%, a slight drop from the prior month's 1.55% but up from 1.47% from the end of 2023 and 1.42% over the previous 12 months.Prime credit RMBS had an 89 basis point delinquency rate in March, up by 6 basis points from February, 7 basis points versus December and 4 basis points from March 2023.Meanwhile, on a month-to-month basis, the late payment rate for government-sponsored enterprise credit risk transfer deals was 4 basis points lower at 1.49% and mortgage insurance-linked notes was 5 basis points lower at 1.24%."Accumulated net losses across non-QM pools, which are still subdued as a tight housing market and resilient economic backdrop continue to support mortgage credit performance overall," the report noted.An unemployment rate of under 3.8% was below historic norms. Inflation, while still hotter than the Federal Reserve likes, held at between 3.8% and 3.9%.The 30-year fixed rate mortgage remained in the 6.6% to 6.9% range for most of the period, which allowed consumers to get used to that environment, the report said.Prepayment speeds have gotten slightly faster on non-QM deals, but are still slow relative to past activity.For the March period, the one-month constant prepayment rate was 8.9%, compared with 7% from the December statements."Prepayment speeds in the other major RMBS segments were either slower or only slightly faster versus non-QM in [the first quarter]," the report said. "For comparison, benchmark GSE CRT reference pools and prime credit collateral pools in aggregate still remained in the area of 3% to 4% CPR, while non-QM in aggregate finished Q1 at nearly 9% CPR."When it comes to new securitizations, pricing volume of $8.8 billion for the first quarter was up 30% from the previous three months. It was also the most prolific quarter since the $9.6 billion produced in the second quarter of 2022, Morningstar DBRS said, citing Finsight.com data."Despite Treasury rates edging up since December, non-QM RMBS spreads were on a general tightening trend, helping keep deal execution costs less volatile and more contained than in Q4 2023," the report said.

Broad modernization efforts at Ginnie Mae will include expanded reporting on steps taken to help distressed mortgage borrowers, the agency announced Wednesday.In addition to collecting more details about payment difficulties and foreclosure prevention, the government mortgage-bond guarantor also will retire some supplemental forbearance reporting from the pandemic, according to a Ginnie Mae press release and related documentation.The move is in line with the Department of Housing and Urban Development agency's goal to keep a better eye on delinquent loans that can put pressure on nonbank counterparties' finances."These data will allow us to better evaluate the liquidity strains in the market," said Sam Valverde, Ginnie's principal executive vice president, in the release announcing additional payment-default status reporting.The new PDS reporting will be a requirement not only for issuers of the securities Ginnie guarantees, but also the vendors responsible for their servicing platforms. Subservicers working with Ginnie Mae issuers also will be subject to the upcoming mandate.Ginnie has had a longstanding focus on monitoring nonbanks' liquidity, which has grown as these financial institutions have come to represent a greater share of its issuer base. The agency has more broadly increased some reporting for nondepository financial institutions in response, including a new "short form" that some executives of nonbank mortgage-backed securities issuers will have to fill out.While single-family mortgage delinquencies have been relatively low recently, they tend to be higher in the loans that Ginnie guarantees the securitizations of and that other government agencies like the Federal Housing Administration and Department of Veterans Affairs back at the loan level.VA delinquencies in particular have been in the spotlight recently as the expiration of a pandemic-related program in October 2022 has reportedly exposed tens of thousands of veterans to foreclosure risk that might have been avoided when that assistance was available.The VA has called for voluntary foreclosure moratorium through at least the end of May, when a successor program will first become available. VA servicers have several months after that to implement it, and the department has asked them to continue to offer foreclosure relief while they do.Both the department's new program and another one the FHA implemented are aimed at helping borrowers whose access to more traditional loan modification programs has been stymied by the fact current market rates are higher than their loan costs at origination, and officials want to see these used.Other recent developments that have called for particularly close scrutiny of nonbanks' financial strength include an origination crunch that has strained many lenders' profitability, and the bankruptcy of a player in the specialized reverse-mortgage market that forced Ginnie to step in and pick up the pieces.Nonbank mortgage companies have asked Ginnie to help alleviate the pressure on them by potentially changing some of its rules for loan pooling and advancing missed borrower payments that add to the strain. The government agency has taken some steps toward doing this but issuers say more are needed.Testing in line with Ginnie Mae's new payment-default status requirement will be during the current second-quarter period, and the reporting is slated to become mandatory in December, after November's federal election.