Let's talk about taxes (and MBS, too) - Movement Mortgage Blog

Last week’s failure to pass a health care bill has reverberated this week through financial markets as investors repositioned themselves for a foreseeable future with Obamacare as the law of the land.

While the implications of President Trump’s failed Obamacare replacement are surely wide, the affect it has had on tax reform is one aspect investors are looking closely at this week.

On one hand, the health bill failure doesn’t harm tax reform because procedurally Congress can still use a budget resolution to pass legislation, which only requires a simple majority vote instead of 60 votes in the Senate. Plus, the health bill failure may actually speed up tax legislation now that the focus on health care is over, at least for now.

However, failing to pass a health care law leaves in place all the taxes the Affordable Care Act enacted. Getting rid of those taxes in a health bill would have lowered the revenue baseline legislators were working with on tax reform. Now, there’s billions of extra dollars that must be accounted for.

So, where does that leave us? Analysts are now thinking a simple tax cut, rather than true tax code reforms are the most likely path forward for the Republicans. Since major overhauls require more broad support — something the health bill showed is clearly not there — there’s waning hope of a comprehensive refresh on taxes.

The market is expecting the most likely outcome will be a reduction in business taxes, which will have the most support. We will know more when the president submits his budget to Congress in May. Analysts are predicting a $1.75 trillion tax cut over 10 years, but based on the disagreement over deficits and spending, there’s some risk that number could be lower by the time a vote arrives.

For the mortgage industry, lower business taxes would likely improve corporate profits and drive the equities market higher while also resulting in more overall economic growth. This would be welcomed by a housing market that needs more supply and benefits when the economy is growing.

However, keep in mind economic growth will further motivate the Federal Reserve to keep a close eye on inflation and raise interest rates accordingly. For now, a moderate rising rate environment with a growing economy remains my forecast.

MBS primer

For the next several weeks I’m going to spend a few minutes explaining the components of the mortgage-backed securities (MBS) market at the end of each blog post. It’s an important part of our business and something I’m frequently asked to explain.

Today, we will look at the general overview of MBS and three major players in that market: Fannie Mae, Freddie Mac and Ginnie Mae.

The U.S. single-family residential mortgage market is made up of an origination market where lenders make loans to home buyers (Movement’s specialty) and a secondary market where mortgage originators sell their loans into large pools of loans with similar characteristics that are securitized (that means converted to a tradeable mortgage-backed securities bond) and sold to investors.

Fannie Mae and Freddie Mac are two competing government sponsored entities created by Congress to buy residential mortgage loans, package them into securities and sell them to investors. These two entities were placed into conservatorship in September 2008 as part of the ongoing financial crisis with oversight by their newly established regulator, the Federal Housing Finance Agency (FHFA). Although these entities continue to be in conservatorship, their role of a major liquidity provider has not changed.  As an originator, Movement is basically a supplier to these firms, and we do sell a large majority of our loans to Fannie and Freddie. These organizations exist to keep liquidity flowing to mortgage lenders, banks, credit unions and other financial institutions.

Fannie and Freddie purchase loans and then provide a guaranty to investors that the loans meet certain standards and will come with timely payments. This protects the investor if a mortgage defaults and makes it less risky for investors to keep buying mortgage loans, thus providing capital to the mortgage market and help more families experience the dream of homeownership.

What about Ginnie Mae? While Fannie and Freddie are merely quasi-government agencies, Ginnie Mae securities are backed by the full faith and credit guaranty of the U.S. government. Ginnie Mae does not buy loans and package them into MBS like Fannie and Freddie. Instead, Ginnie Mae provides a guaranty of timely payments on federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA), the Department of Agriculture’s Rural Development (RD) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH).

As the only MBS to carry the full faith and credit guaranty of the federal government, even in difficult times, an investment in Ginnie Mae MBS is one of the safest an investor can make.

At Movement, we originate loans tied to all three of these organizations. They are important partners in making sure loans meet credit standards and will be purchased by investors, therefore guaranteeing liquidity so we can continue to finance more homes for families.

Next week, we will look at Guarantee Fees. What they are, how they are derived and the impact on pricing.