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Utilization of FICO's 10T credit score model is gaining additional momentum in 2024, with two different lenders signing on to use it for various purposes before broader mandated adoption arrives next year. Ohio-based national direct lender Liberty Home Mortgage is the latest company opting for the FICO 10T model, announcing it would start employing it for nonconforming originations. Liberty joins several other companies already using 10T for nonconforming loans, including Movement Mortgage and Crosscountry. In the first quarter of this year, Primis Bank, Premier Lending and Cardinal Financial, likewise, all agreed to begin use of FICO 10T for certain types of originations.Introduced in 2020, the FICO model was selected along with Vantagescore 4.0 by the Federal Housing Finance Agency as one of two score models lenders will eventually need to consider when underwriting to make them eligible for sale to government-sponsored enterprises. The use of two new models will replace the FICO Classic score, which has been a requirement for two decades.Full implementation of the FHFA plan is expected to occur by the end of 2025, although some elements of the proposal are likely to come sooner. Rather than wait for mandated changes to arrive, a small number of lenders began working with the 10T model as recently as last year for nonconforming loans sold to private investors. In February, Cardinal Financial said it would begin looking at 10T scores specifically for Department of Veterans Affairs originations, which are also not sold to Fannie Mae or Freddie Mac and don't have a specific requirement for this type of credit metric like they do. Cardinal was the first to announce it would use the model for VA loans.FICO claims the predictive analysis offered through 10T can increase originations by as much as 5%, while reducing default risk by up to 17%.The addition of Liberty Home Mortgage to the list of FICO 10T users comes a week after Planet Home Lending also said it would incorporate the model in its recapture analysis of its servicing portfolio, which contains government-backed and conventional mortgages from its distributed retail channel or correspondent division. "We're eager to tap the power of FICO Score 10T to further analyze our book of business and unlock new origination opportunities," said John Bosley, Planet Home Lending mortgage president, in a press release.  Planet Home's use of 10T also points to the growing consideration of new scores in broader contexts within the mortgage industry. In February, the Federal Home Loan Bank of San Francisco indicated it would begin accepting mortgage collateral from lenders using Vantagescore 4.0.With the most recent additions, FICO 10-T is now in use in some aspects of the business at mortgage companies with a combined cumulative origination volume of more than $100 billion, the data analytics software provider said. Those same companies service nearly $300 billion in mortgages.

The Consumer Financial Protection Bureau announced Wednesday that it was eliminating its Office of Supervision, Enforcement and Fair Lending, splitting that office's responsibilities among existing offices.Bloomberg News Consumer Financial Protection Bureau Director Rohit Chopra announced that its supervision and enforcement offices will operate as separate, stand-alone divisions within the bureau.Chopra told the CFPB's staff in February that he had dissolved the Office of Supervision, Enforcement and Fair Lending and also had eliminated the associate director job that had been held by former acting CFPB Director Dave Uejio. The move was made public Tuesday as part of a procedural rule change in which the CFPB updated how the agency designates nonbanks for supervision. The upshot of the changes is that Enforcement Director Eric Halperin and Supervision Director Lorelei Salas now report directly to Chopra without the layer of another senior official in-between. "We will be transitioning the administrative structure of [the Office of Supervision, Enforcement and Fair Lending] into two separate operating units," Chopra wrote in an email to staff. He announced in February that Uejio had accepted a job at the Federal Housing Finance Agency and that his position as associate director would be eliminated. "A flatter organization structure will allow us to be more agile in our response to emerging risks and will facilitate faster decision-making," Chopra wrote in the email. "In the early days of the CFPB, there was concern that Supervision and Enforcement needed to be in a single division in order to foster robust collaboration and coordination on deploying our tools."As part of the changes, a half-dozen employees were reassigned to other positions.   David Bleicken, the CFPB's deputy associate director of the now-defunct Office of Supervision, Enforcement and Fair Lending, remains in a senior role at the bureau. Previously, the CFPB's fair lending office was stripped of its enforcement powers in 2018 under former CFPB Director Mick Mulvaney, and that unit, the Office of Fair Lending and Equal Opportunity, has been under the CFPB director's purview ever since. The CFPB has not updated its organization chart since January. Salas is still listed as acting assistant director of the Office of Supervision Examinations and assistant director of the Office of Supervision Policy. She is now director of supervision, a spokesman said.The organization changes could have an outsize impact on nonbanks that are designated as risky and, therefore, subject to supervision. Because of the elimination of the associate director job, the CFPB made changes to reflect that the new supervision director is now the "initiating official" in supervisory designation proceedings, as well as in so-called contested proceedings. The update was necessary to transfer the former associate director's supervision-related functions to the supervision director.Some experts who follow the CFPB closely said the net effect of the move is that Chopra eliminated a career civil service job, concentrating more authority in the director's office. Further, though CFPB supervisory exams are confidential, the CFPB in February publicly released the first decision in a contested proceeding against World Acceptance Corp., a large installment lender that the bureau said poses a risk to consumers. It marked the first time that the CFPB publicly disclosed its findings to supervise a nonbank after a contested administrative proceeding. The determination of supervising a nonbank now can be made by the director of supervision in a recommendation to the CFPB director without an additional senior official weighing in.  The bureau initiated its first round of supervisory designation proceedings last year after announcing in 2022 that it would actively use a dormant authority to supervise nonbanks that are not currently subject to supervisory exams. The CFPB said that entities can either consent to supervision or contest a notice. 

An influential government-related mortgage investor active in the first-lien market could become a purchaser of some home-equity loans under a concept its regulator put forth late Tuesday.Freddie Mac would actively buy some closed-end second liens if it holds the first mortgage under a proposal the Federal Housing Finance Agency announced in line with its pre-approval rule for new products. The proposal is a new take on something Freddie dabbled in decades ago, though in the prior instance such loan purchases came to a nonmaterial amount. This time around, the loans would be positioned as an alternative to cash-out refinances that have become uneconomic for the many older loans originated at lower-than-current-market rates."The proposed activity is intended to provide homeowners with a cost-effective alternative for accessing the equity in their homes," said FHFA Director Sandra Thompson in a news release.It also could have synergies with housing programs like Freddie's Affordable Seconds. The enterprise has relied on other entities to fund the second liens used to help expand homeownership options for borrowers and the new product could broaden its reach.Stakeholders will have 30 days to comment on the proposal. The FHFA will decide whether to move forward with the proposal within the subsequent 30 days, with the pending federal election in November likely adding some urgency for quick decision-making on the issue.The concept outlined addresses a specific need inherent in the composition of the current market but how receptive the mortgage industry will be to it may depend on some yet-to-be specified details."I think it's an interesting point in time where cash-out refinances don't pencil out from the consumer perspective," said Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers Association. The extent to which it addresses that challenge may depend on what Freddie Mac will offer for the second lien it buys and what any associated loan-level pricing adjustments are like, something the comment period may shape."We haven't seen pricing or LLPA grids, or anything like that, so it's a little early to tell, but I guess the important thing here is that's sort of the point of the new activity process," Mills said.How depositories respond to the concept remains to be seen. To a degree, closed-end seconds compete with HELOCs, but generally holding the former in portfolio is not attractive to banks, for whom lines of credit are a better match with their deposits. Some nonbanks may sell closed-end seconds to the private secondary market but it's considered a limited market."Certainly that will be part of the discussion in the comment process around what market need is this serving?" Mills said, referring to one of the points raised in a series of questions the FHFA suggested commenters address.As a government-sponsored enterprise, Freddie Mac may be able to provide at lower-than-market rates for closed-end seconds, particularly if it can eventually amass enough product for securitization and manage the loans' risks without making too many pricing adjustments for them. These loans by nature are riskier than first liens given their subordinate position, but Freddie does propose some guardrails aimed at protecting their performance. These include 20-year fixed rates, a fully amortizing structure, and loan-to-value ratios limited to 80% or 65% for manufactured homes."Credit risk transfer opportunities would be evaluated in subsequent phases," the proposal also noted.Land trust and cooperative share loans would not be eligible. The representation and warranty framework would be independent from that of the first mortgages.Even within limits on primary loan type, the combined LTV and other factors, the volume could be considerable, particularly if both Freddie and its larger competitor, Fannie Mae, were to become active in this area, Bank of America researchers wrote in a report Wednesday."For mortgages owned by the two GSEs, equity extraction could be as much as $1.8 trillion on sub-4% mortgage loans, keeping the CLTV below 75%," they said.Closed-end seconds may pose less risk for Freddie than cash-outs and put more decisions about distressed loans in its hands as opposed to a servicer's, according to the Bank of America researchers."Freddie Mac would have a lower credit first on a combined low first-rate lien and a high rate second-lien than a high-rate cash-out refi loan partly due to the shorter term on the second," they said. "Having ownership of both the first lien and the second lien mortgage would allow Freddie Mac to have better control over loss mitigation policies."The proposal appears aimed at keeping the servicing somewhat in line with that of first mortgages, with loss mitigation and foreclosure activities for all the loans requiring Freddie Mac approval. If the first lien is refinanced, the second must be paid off absent any jurisdictional legal prohibitions against it.The seconds would be manually underwritten and sold outright through the cash window in limited quantities to start. They wouldn't immediately be eligible for forward delivery or the to-be-announced market. They'd be held for six to nine months until non-TBA securitizations could be established.Freddie would eventually aim to provide automated underwriting for the home equity loans. 

Lawmakers are pushing to pass Senate bills that include what has been described as the most significant rural housing reform in years. Experts spoke in favor of the Rural Housing Service Reform Act Wednesday before a small audience of the Senate Committee on Banking, Housing and Urban Affairs. The bill among other actions would update home repair financing initiatives and protect hundreds of thousands of renters at properties where federally sponsored mortgages are maturing. "This legislation is going to make long overdue updates to RHS programs that are really needed," said Robin Davey Wolff, senior director of rural communities at Enterprise Community Partners, a housing non-profit. A bipartisan group of senators in the Housing, Transportation and Community Development subcommittee were optimistic but noncommittal on getting a vote on the act by the end of the year. Bipartisan U.S. Representatives have introduced a similar version in the House. The bill's widest impact would address a threat facing rural renting housing loans. Four hundred thousand low-income tenants would receive rental assistance at properties which have those Department of Agriculture-sponsored loans. Passage of the act would decouple rental assistance from those mortgages, protecting 137,000 low-income renters at properties with those loans maturing in the next 10 years.The act would also make it easier for nonprofits to acquire those properties, according to Minnesota Sen. Tina Smith's office. The Democrat and sponsor of the bill said her home state has the most of those mortgages maturing than anywhere else in the country.The bill would also make permanent a community development financial institution fund for Native American communities, and yet-to-be-determined additional funding for technology upgrades for rural housing services. Pennsylvania Sen. John Fetterman, a Democrat, and Wyoming Sen. Cynthia Lummis, a Republican, also promoted their Whole-Home Repairs Act, which would create a five-year pilot based on a program in Fetterman's state. The program would create a repair grant program for low- and moderate-income homeowners. Many homes are irreplaceable in that they could not or would not be replaced because of the lack of economic incentive to build new units, said Jesse Ergott, president and CEO of NeighborWorks Northeastern Pennsylvania."Likewise, when there's extensive deferred maintenance, there isn't an economic incentive for investors to purchase these homes in many markets," he said. Expert witnesses compared the pending bills to stalling aid in Congress. The Community Development Block Grant program has been flat-funded since fiscal year 2022, Wolff said, while the Department of Housing and Urban Development's HOME Investment Partnerships Program received $250 million less funds in the past fiscal year. The push by lawmakers follows the Biden Administration's call for bipartisanship in achieving housing goals. The industry meanwhile has had a tepid reaction to the White House's larger aims in housing, including a controversial title insurance pilot program. 

Consumers navigating a hard-to-predict housing and rate environment helped push home loan applications higher last week, according to the Mortgage Bankers Association.Following a three-week period when lending volumes largely moved sideways, the MBA's Market Composite Index jumped a seasonally adjusted 3.3% from seven days earlier. In the previous week, applications managed to nudge up by 0.1%. But on a year-over-year basis, it came in 3.4% lower. The index measures application activity based on surveys of the trade group's membersVolume picked up despite the latest rise in interest rates, with economic data pointing to persistent inflation and a robust economy. The 30-year average for loans with conforming balances making them eligible for sale to the government-sponsored enterprises accelerated to 7.13% from 7.01% one week prior. The average among MBA lenders ended at its highest point since December, said Joel Kan, MBA vice president and deputy chief economist.Points to help bring down the rate, meanwhile, increased to 0.65 from 0.59 on 80% loan-to-value ratio applications. "Despite these higher rates, application activity picked up, possibly as some borrowers decided to act in case rates continue to rise," Kan said in a press release.Purchase applications drove most of the uptick in a housing market that has data pointing in sometimes contradictory directions. The MBA's Purchase Index climbed up by a seasonally adjusted 5% after four weeks of declines. But applications were still 9.9% lower from the same survey period a year ago. While homes are selling quicker compared to last year in much of the country, fewer sellers expect bidding wars, and price cuts are also becoming more common, according to reports from Realtor.com and Zillow this week.  And although housing inventory has also shown signs of picking up to start 2024, a greater number of homes on the market is also not resulting in increased affordability. The average purchase-loan size stop increasing last week, though, after reaching an almost two-year high in late March. The mean amount settled at a still-elevated $447,900, down a fraction from $449,400 a week earlier.Purchases increased at a greater pace than the MBA's Refinance Index, which squeezed out an 0.5% weekly gain. But on a year-over-year basis, refinance volumes shot up 11.3%. The share of refinances relative to total volume came out to 32.1%, falling from 33.3% seven days prior.Higher fixed rates typically lead to heightened interest in adjustable mortgages, and last week was no exception with the ARM Index rising 8.7%. Adjustable-rate mortgages also garnered 7.3% of all applications compared to 6.9% in the previous survey period. The conventional lending market provided most of the momentum for lenders last week, as the Government Index slowed a seasonally adjusted 2.2%. The share of federally backed activity also contracted, primarily due to reduced volumes coming through the Department of Veterans Affairs. VA-sponsored applications made up 12.4% of total volume, dropping from 14% in the prior survey. But Federal Housing Administration-guaranteed loans took a 12.3% share, inching up from 12.1%. The segment of mortgage applications sponsored by the U.S. Department of Agriculture was 0.4% week over week. Mortgage rates tracked by the MBA headed up across the board in tandem with the conforming average. The 30-year fixed-contract jumbo average leaped 27 basis points to land at 7.4% from 7.13% the previous week. Points decreased to 0.46 from 0.56 for 80% LTV-ratio loans.The average 30-year contract rate for FHA-backed loans accelerated to 6.9% from 6.8%. Borrower points rose by 6 basis points to 0.99 from 0.93.The contract rate average of the 15-year fixed mortgage shot up 18 basis points to 6.64% from 6.46% a week earlier. Points to buy down the rate increased to 0.64 from 0.6.The 5/1 adjustable-rate mortgage, which starts with a fixed 60-month term, averaged 6.52% compared to 6.41% seven days prior. Points dropped to 0.6 from 0.67.

Bank of America's credit card losses hit their highest levels since before the pandemic in the first quarter, the company reported Tuesday.Angus Mordant/Bloomberg Though Bank of America's profits dipped in the first quarter as it built a larger cushion for bad credit cards and office loans, bank executives are optimistic they've pulled the appropriate levers to manage credit going forward. The Charlotte, North Carolina-based bank reported that its net charge-offs increased by more than 80% from the same period last year, from $807 million to $1.5 billion, as consumers struggled to pay off their credit card debt and turbulence in the commercial real estate sector continued. To manage the rising credit risk, Bank of America posted a $1.3 billion provision for credit losses, up from $931 million a year earlier."All of this is still well within our risk appetite and our expectations, and it's consistent with the normalization of credit we've discussed with you in prior calls," Chief Financial Officer Alastair Borthwick said Tuesday on the bank's quarterly earnings call. Bank of America reeled in net income of $6.8 billion last quarter, down from $8.2 billion in the first quarter of 2023, dampened in part by the credit-loss provision and a special assessment from the Federal Deposit Insurance Corp. related to bank failures last spring. The bank's stock price fell Tuesday by 3.5% to $34.68.The company provided more information about its exposure to office loans, which has been a hot topic among regional banks that tend to have bigger office loan portfolios. Bank of America has about $17 billion in office loans, which is just 1.6% of its loan book. Some 12% of the bank's office loans were classified as nonperforming in the first quarter, while 16 loans were charged off.Some $7 billion of the company's office loans, or roughly 41% of its portfolio, are slated to mature this year. About half that figure will mature in 2025 and 2026, which implies the losses have been "front-loaded and largely reserved," Borthwick said."We're using a continuous and thorough loan-by-loan analysis, and we're quick to recognize impacts in the commercial real estate office space through our risk ratings," Borthwick said on the company's earnings call. "As a result … we've taken appropriate reserves and charge-offs."Last month, Bank of America CEO Brian Moynihan told Bloomberg Television that problems in the commercial real estate sector will be a "slow burn."Banks' property loans have faced increased scrutiny in recent months, though most of the focus has been on regional lenders. Among the U.S. megabanks, Wells Fargo also reported an annual rise in charge-offs in its commercial real estate portfolio in the first quarter.Bank of America's bigger credit troubles last quarter, however, were in the consumer sector, which accounted for two-thirds of its credit losses. Credit card charge-offs hit a rate of 3.62%, their highest level since a decline during the COVID-19 pandemic, when consumers were buoyed by government assistance.Over the next few quarters, it appears that BofA's credit card losses may stay at existing levels, or even increase, said David Fanger, senior vice president of the financial institutions group at Moody's Investors Service."Credit card losses are above pre-pandemic levels, and that's somewhat unexpected," Fanger said. "It's not unique to Bank of America, but it's certainly something that bears watching. It is a headwind. It is now contributing pretty significantly to their provisions in the quarter."Despite the rise in charge-offs, Fanger described the bank's credit performance in the first quarter as "resilient."During the quarter, Bank of America logged relatively stagnant loan growth. High interest rates have not only tamped down loan demand, but they have also driven up the cost of deposits.Yet elevated rates will positively impact asset repricing, Borthwick said. "Generally speaking, a higher-for-longer [rate environment] is probably better for banks," he said. "The question will become, 'Why are rates higher? What's going on in the economy? Are we talking about inflation? Is it under control? Is it coming down?'" He went on to indicate that inflation does now appear to be under control.Moody's Fanger argued that Bank of America's positive view of the interest rate outlook implies that the company doesn't anticipate significantly more credit losses.He also said that Bank of America's net interest margin, which increased for the first time in four quarters, implies that the strain of higher rates on deposit costs is starting to steadily abate. The bank's net interest margin of 2.5%, including global markets, was up from 2.47% in the fourth quarter of last year.

Ramon Walker, owner of Mortgage Solutions FCS, dba Client Direct Mortgage, and creator of a Facebook group dubbed "Rocket Pro TPO vs. UWM," has asked a Michigan federal court to dismiss a suit pegged against him by United Wholesale Mortgage.The original complaint accuses Walker of trademark infringement and not paying an outstanding early payout balance of $124,011.37. The motion to dismiss filed Monday, argues the trademark infringement claim is a "pretext to muzzle [Walker's] criticism." Additionally, Walker's filing says the broker never actually signed an agreement in which he would owe an EPO, thereby, the alleged breach of contract claim is void.In December, UWM sent a cease-and-desist, warning Walker that it was closely monitoring the Facebook group he created and asking the broker to remove all improper use of the wholesale lender's intellectual property. Simultaneously, UWM demanded Walker pay the allegedly owed EPO based on an agreement between both parties. The wholesale lender followed up with a suit filed Feb. 14 accusing Walker of using its logo in the Facebook group's banner. The group, which now has over 6,000 members, removed the logo as of early January.Regarding the EPO balance, Walker did business with UWM as a non-delegated correspondent lender from June 2020 through May 2023. During that time, at least 12 loans delivered by Client Direct Mortgage were paid off within 180 days of disbursement, UWM's original suit states.Its "failure to pay its early payoff balance is a breach of the correspondent agreement that has caused UWM damage," the lender said in its complaint.In actuality, the correspondent agreement "is undisputedly not signed by either party and UWM does not even allege that the purported 'amendment' was ever signed," making it unenforceable, says Walker's motion."UWM's claims represent nothing more than a vendetta against independent mortgage brokers, like Mortgage Solutions, and their principals, like Walker, who formerly worked with UWM but then chose to leave and work with UWM's competitor, Rocket Pro TPO," the motion filed April 15 said. "Not only does UWM seek to burden and harass those who choose to work with UWM's competitors, UWM also seeks to muzzle any criticism by bringing frivolous claims of trademark infringement in a transparent effort to stifle free speech and debate."Concurrently, potential litigation may be sprouting up against UWM following an explosive Hunterbrook Media report alleging the megalender pressured brokers to use it and overcharged borrowers. Three shareholder rights law firms said they have launched investigations looking into the Pontiac, Michigan-based lender.Bragar Eagel & Squire, P.C.,Glancy Prongay & Murray LLP and Law Offices of Howard G. Smith in separate announcements announced they will be looking into whether UWM violated the federal securities law. The law requires for publicly traded companies to keep investors informed regarding their financial health,All the law firms note Hunterbrook's report and the racketeering consumer class action filed shortly after put pressure on UWM's stock price, causing it to fall by $0.56, or 8.5%, to close at $6.00 per share on April 2, thereby allegedly injuring investors.It is uncertain exactly what the law firms will be investigating. None of them responded to a request for comment at the time of publication. UWM did not immediately respond to requests for comment addressing both Walker's motion and the three firms launching investigations.

Federal Reserve Chair Jerome Powell said international collaboration helps the central bank in times of crisis and for more routine policy reforms.Olivier Douliery/Bloomberg Federal Reserve Chair Jerome Powell said U.S. policymakers benefit from participating in international governance groups — in good times and bad.Speaking during a policy forum on Tuesday, Powell spoke about the advantages of engaging with other central banks through organizations such as the Basel Committee on Banking Supervision. He noted that collaboration is particularly helpful during moments of crisis."When there is a situation where there's serious stress, you need to get a global perspective, you need to get perspective around the world, and you need to do that very quickly," Powell said. "The thing that you figure out in those times is that [because of] all the time you spent in Basel, in G7, G20 meetings, you know your colleagues, you know and trust and respect their judgment, and you don't have to go through that that phase of gaining trust in people. You understand each other, you speak the same language."Powell added that those groups have also been useful policymaking resources during calmer periods. He pointed to the Fed's monetary policy review, which was conducted between 2019 and 2020, and its various regulatory reform efforts as areas that have benefited from looking abroad."Part of the way that I get to thinking about what the right policy is for the United States is to hear what is going on around the world, what's happening globally and how people think about that," he said. "So it's very, very useful."Powell's comments came during the Washington Forum on the Canadian Economy, an event hosted by the Woodrow Wilson International Center for Scholars in Washington, D.C. He was joined on stage by his counterpart Tiff Macklem, the top ranking official at the Bank of Canada.Macklem said collaboration between countries is essential for crafting some policies, such as regulatory requirements and anti-money laundering standards."There are some things that we're only going to succeed at if we do them together. The obvious one would be financial supervision and regulation. Our financial systems globally are highly integrated. We were deeply reminded of this in the global financial crisis. What happens in other countries affects all of us. And money flows across borders," he said. "We have to do that together, or it's not going to work."The comments from the central bank leaders come as the Basel Committee on Banking Supervision faces renewed skepticism in some circles of Washington as a result of capital reforms proposed by bank regulators last summer.Dubbed the Basel III endgame, because it would implement the final components of the most recent set of standards put forth by the international committee, the package has elicited strong pushback from banks and other industry groups. One of the chief criticisms is that the regulations would be overly stringent given the complexity of the U.S. banking sector, raising the question of why American regulators agreed to adopt them in the first place. "I'm wondering, where did we get this notion that the United States, as the financial superpower of the world, must conform to European standards of banking?" said Rep. Ritchie Torres, D-N.Y. in a House Financial Services Committee hearing last month. "As a U.S. policymaker, the most important question for me is not whether the U.S. banking system is acting in conformity with Europe's banking system. The most important question is whether the U.S. banking system is achieving the best possible balance between economic growth and financial stability."The praise for global collaboration also comes as the International Monetary Fund and the World Bank Group hold the annual spring meeting in Washington, D.C. this week, bringing central bankers and other policymakers from around the world together.Powell noted that the benefits of international cooperation are not limited to set meetings or conventions. "I'm constantly talking to other central bankers around the world, also political leaders in our government, and that sort of thing," he said. "It's less about coordination than it is about talking and understanding."

The Government Accountability Office found that Silicon Valley, Signature and First Republic banks on the eve of their failures borrowed substantially more from the Home Loan Bank System than a group of their peers that included 16 commercial banks. Silicon Valley Bank, Signature Bank and First Republic Bank increased their outstanding borrowings from the Federal Home Loan Bank System by more than a third each shortly before failing, according to the Government Accountability Office.The increase in borrowings is the subject of a 27-page GAO report issued last week that examines the role of the Federal Home Loan banks in providing liquidity to their members during the banking crisis in the spring of 2023. The report provides a granular take on where money was going to the failed banks in the ninth inning of their existence as each sought to stem massive outflows from depositors. The GAO found that the three banks borrowed substantially more from the Home Loan Bank System than a group of their peers that included 16 commercial banks.The report is the first in a series in which the GAO will look at broader issues related to the Home Loan Bank System. The private network of 11 regional, cooperative banks was created in 1932 after the Great Depression to serve as a source of funding for thrifts originating mortgages. The report was requested by House Financial Services Committee Chairman Patrick McHenry, R-N.C., and the panel's ranking Democrat, Rep. Maxine Waters of California."GAO found the FHLBs of New York and San Francisco provided significant levels of advances to these banks compared to others, and that Signature Bank used FHLB advances to offset liquidity gaps it experienced related to crypto-related deposits," Waters said last week in a press release. "Meanwhile, SVB was unable to reposition collateral quickly enough from its FHLB to the Fed's discount window to access emergency liquidity."Starting on March 1, 2023, SVB increased its borrowings by 50% to $30 billion and then failed a week later. Signature's borrowings rose 37% to $11.2 billion in the first two weeks of March before it failed that same month. And First Republic's borrowings jumped 45% to $28.1 billion in the first two weeks of March before it failed in May, the GAO report found. The GAO looked at the communication and coordination of the Home Loan banks with the Federal Deposit Insurance Corp. and Federal Reserve System — the failed banks' primary federal regulators — and the repayment of the failed banks' outstanding loans, known as advances, to the system. "One of the main areas of focus is: Are the Federal Home Loan banks managing their relationships and their counterparty risk with institutions as they begin to fail, and do they have the right agreements and oversight in place with the Fed and others?" said Jim Parrott, co-owner of Parrott Ryan Advisors and a nonresident fellow at the Urban Institute. "When everything's going 90 miles an hour, as an institution begins to take on water, are all of the relevant regulators and others who are in some sense indirectly responsible for taxpayer risks … coordinating?"The GAO said that SVB failed before the Federal Home Loan Bank of San Francisco was able to request additional supervisory information from the Federal Reserve Bank of San Francisco. The New York and San Francisco Home Loan banks both were able to communicate with the FDIC about Signature and First Republic as those banks were declining, the GAO said."It was striking to me that [the Home Loan banks] kept lending to these failing banks until the very last week or days before they failed," said Sharon Cornelissen, director of housing at the Consumer Federation of America and chair of the Coalition for FHLB Reform. "Only because the Federal Home Loan Bank of San Francisco does not lend over the weekend, SVB was frantically trying to gain access to the [Fed's] discount window at the very last moment."The report was released several months after the Federal Housing Finance Agency's review of the system. FHFA, the system's regulator, released a 100-year review of the Home Loan banks in November that included 50 recommendations for reforms. Waters said she is working on legislation to implement many of the FHFA's recommendations, including doubling the system's contributions to affordable housing to 20% from the current congressionally-mandated 10%. She also is exploring ways to improve access and functioning of the Fed's discount window. Teresa Bazemore, president and CEO of the San Francisco Home Loan Bank, said in an interview last week that it is important to understand what was happening ahead of the March 2023 liquidity crisis. Banks and credit unions were flush with record levels of deposits in 2021 from government stimulus programs in response to the pandemic. At that time, the Home Loan banks' core business of providing liquidity to members had dried up. But in 2022, money market mutual funds started offering depositors higher rates, putting many banks in a squeeze.  "Some of the money started to outflow from [member] banks at the same time those institutions had already invested some of that money. They'd already loaned it out, they'd already made mortgage loans [and] put them in their portfolios. They bought securities," Bazemore said. "So if you compare where things were at the end of 2021 to the end of 2022, you saw our advances go up as a system because of that transfer of deposits out of the banks and credit unions. And that's really what the system was set up for."The Federal Reserve hiked interest rates 11 times between 2022 and 2023 in an attempt to curb inflation. As a result, many banks were "upside down" and needed to borrow from the Home Loan Bank System, or alternatively, had to bring in brokered deposits, Bazemore said. Brokered deposits are typically made by companies with the assistance of a third party."If you've got a portfolio of 3% mortgage loans, where are you going to get the income to pay 4% or 5%, to compete with the money market [funds]?" Bazemore asked.The GAO report also looked at the repayment of advances by the failed banks and whether there was a cost to the federal Deposit Insurance Fund. After regulators took aggressive steps last year to protect uninsured depositors, particularly venture capitalists after the failure of SVB, the FDIC assessed a special fee on more than 100 banks to replenish the fund, known in bank parlance as the "DIF." The GAO report said that repayment "does not impose a direct cost'' but that "research findings vary" regarding the risks that failed banks' advances from the system pose to the DIF. Home Loan banks have a priority position ahead of the FDIC when a bank goes into receivership, an issue that has become a bone of contention among critics of the system. The GAO said that in 2000 and 2005, respectively, studies by the Fed and FDIC noted that "FHLBanks' priority position in receivership could subsidize member bank risk-taking, which could imply greater losses for the Deposit Insurance Fund."The GAO also said that a 2023 FHFA review of academic literature found that Home Loan banks' regulatory policies and practices mitigate moral-hazard concerns, while a study by the Urban Institute last year found that an increase in a commercial bank's use of advances reduces the odds of failure, particularly for a smaller bank.Still, the report noted that "if proceeds of the failed bank's liquidated assets do not cover claims eligible for the fund after repayment of FHLBank advances and any other secured claims, the Deposit Insurance Fund would incur costs.''The GAO report also detailed the fees charged by both the San Francisco and New York Home Loan banks, which varied dramatically. Bank failures may trigger prepayment fees that the Home Loan banks charge, which are required by the FHFA for certain products. Waiver fees also may be charged if a member-bank makes voluntary prepayments. The Home Loan banks also may waive the fees, or even charge the FDIC, as the receiver of a failed bank, a waiver fee to compensate for risks. Prepayment penalties also vary depending on the length and terms of an advance. The FDIC typically pays off advances and incurs a fee in order to take the collateral that has been pledged by a commercial bank to a Home Loan bank. After SVB failed, the FDIC transferred all its deposits and nearly all of its assets to Silicon Valley Bridge Bank, which repaid the $30 billion in outstanding advances to the San Francisco Home Loan Bank. The San Francisco bank received $266.5 million in prepayment fees and $18.8 million in waiver fees. Most of SVB's advances had terms of one to three years. "SVB did not have a particular stated strategy for borrowing advances in that maturity range," the GAO said, citing officials from the San Francisco Home Loan Bank. Meanwhile First Republic's outstanding advances were assumed by JPMorgan Chase, which repaid roughly $5.8 billion in loans that had reached maturity, and has indicated that it plans to repay the remaining advances according to the advance terms. In contrast, after Signature Bank failed, the Federal Home Loan Bank of New York also received full repayment for Signature's $11.2 billion in outstanding advances but received just $260,000 in prepayment fees and no waiver fees.  "The broader discussion is whether this is the role that we want [the FHLBs] to play," Cornelissen said. "According to the law they were within their rights to provide liquidity, but we should be more tightly regulating them because it's not their place to be the lender of last resort. They are going to keep lending until the very last day because that's their business model and presents no risk to them."Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, the system's trade group, applauded the GAO report for finding that the system made efforts to coordinate with the Federal Reserve banks of New York and San Francisco in accordance with policies and procedures."We appreciate the findings in the GAO's report, and we believe they validate what we have been saying for a year: that the FHLBanks acted as a critical shock absorber for the financial system during a period of unprecedented turbulence in the spring of 2023," Donovan said. "The two most important takeaways from this report are that the FHLBanks provided crucial liquidity to their members in direct accordance with the structure and role laid out for them by Congress, and that the FHLBanks worked tirelessly in a coordinated fashion with primary financial regulators to ensure the safety and soundness of the U.S. banking system."The Federal Home Loan Bank System reported earnings of $6.7 billion at year-end, an 111% jump from a year earlier. The system also paid out a record $3.4 billion in dividends to its members, more than double the $1.4 billion paid in 2022.The GAO report is dated March 8 but was released on April 8 after lawmakers and the Home Loan banks had a month to assess its findings. 

Fannie Mae is selling agency mortgage backed securities designed to appeal to socially minded investors, as the mortgage giant looks to draw more buyers into the market to help fill a void left by the Federal Reserve stopping purchases.Since March, the government-sponsored enterprise has been selling agency MBS that are scored according to a set of revamped criteria that gives extra weight to mortgages with certain characteristics, such as whether they're used for affordable rental housing or are to borrowers in rural areas with high poverty levels.The goal is to give investors who buy MBS more visibility into the underlying mortgages. Greater availability of data can make it more attractive to buy MBS with loans to underserved borrowers, translating into lower interest rates to borrowers with those types of mortgages."It costs money to originate one of these mortgages," Fannie Mae Chief Executive Officer Priscilla Almodovar said in an interview, referring to the costs that lenders incur when they make mortgages to underserved borrowers. "This is the way for us to incentivize them." The new program is an updated version of the "social" index first rolled out in late 2022. Change is needed, Almodovar said, because the agency MBS market is transitioning to a new era in which two of its biggest investor groups no longer hold the dominant roles in the market that they used to, or are missing in action altogether. Domestic banks have lessened participation and the Federal Reserve is letting MBS roll off its balance sheet.It's hard to overstate how important those two players have been in the market the past 15 years, according to Devang Doshi, a senior vice president at Fannie Mae. Fannie Mae and sister groups Freddie Mac and Ginnie Mae have issued around $4 trillion of MBS over that period — which Doshi said is nearly all accounted for by the Federal Reserve and domestic banks' added holdings.  "Mortgage rates are going to be dictated by asset managers and no longer the Fed's portfolio," he said, adding this is why Fannie Mae must take steps to ensure MBS are attractive to investors.Fannie Mae first auctioned mortgage bonds with Mission scores in March, with a second sale held earlier this month. Freddie Mac will begin applying the new Mission Index criteria to its own bonds starting in June. "It's still too early to tell how effective the mission index will be in creating demand for underserved borrowers," said Erica Adelberg, MBS strategist for Bloomberg Intelligence. "But there currently aren't a lot of [MBS] pools that score high on the Mission rankings, so it seems like there's room for upside."Pools with high scores may not only appeal to investors looking to satisfy social mandates, Adelberg added, but also funds looking for more-favorable prepayment behavior.