MReport August 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 23 of 67

22 | TH E M R EP O RT FEATURE objective, the release of the GSEs and/or the design of a new guar- antee structure is more than likely to incorporate requirements to sustain securitization of the 30-year mortgage by continuing to match mortgage lenders with investors that can manage the long-term interest rate risks associated with a 30-year product. 02 Maintain Equal Access for Lenders T oday the GSEs play a central role in providing liquidity that is accessible to lenders of all sizes, charters, and geographic locations. In 2017 and 2018, Fannie Mae and Freddie Mac originations represent- ed just under 50% of total volume, according to the Urban Institute. Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) originations account for about a quarter of total volume, and portfolio originations make up another 30%. Prior to conservatorship, private-label secu- rities (PLS) accounted for roughly one-third, to as much as half, of all originations. Restoring a healthier and more competitive mix of securitiza- tions, one not entirely dependent on GSE and government-backed securitization, would contribute to a more functional mortgage market that meets the needs of all lend- ers. Before the Mortgage Bankers Association, Calabria said, "I'm a big believer in competition." Among the specific components required to maintain access for smaller lenders is the preserva- tion of the TBA market model and the cash window for loan sales. In releasing Fannie Mae and Freddie Mac, the ability for smaller lenders to continue to deliver into the TBA market, bypassing the volume requirements for "speci- fied pool" markets, should remain unchanged. Maintaining the GSEs respective cash windows for the outright purchase of single loans is extremely important for the stabil- ity of small and even mid-sized lenders. When delivering loans through an aggregator are added to allowing direct investor delivery without incurring the pricing and product impairments, the cash window creates securitization access in an environment that minimizes market risk for smaller market participants. 03 Establish New Capital Standards C alabria has been vocal about the importance of setting and achieving appropriate levels of capital and liquidity, saying in May, "It was insufficient capital that triggered the conservator- ship, and it's going to be sufficient capital that triggers an exit." FHFA is in the process of once again reviewing the GSEs' current capitalization, but Calabria has said that "step one" will be to end the current net worth sweep of Fannie Mae and Freddie Mac's earnings. This measure alone, however, is not expected to build capital fast enough to align with the administration's timeline. FHFA is considering other options, includ- ing raising capital through initial public offerings (IPOs) and hopes to begin implementing new capital building measures by January 2020. Although no specific levels have been established, a suitable capital requirement threshold has been the source of industry, regulatory, and congressional debate for years. "With a leverage ratio of nearly one thousand to one, the GSEs' balance sheet capital cushion is razor-thin relative to their huge amount of assets," Calabria said at the Secondary Market Conference. "As a regulator, my primary concern is that the GSEs maintain capital levels commensurate with their risk profiles," he added and suggested Fannie Mae and Freddie Mac should be subject to the same capital requirements as large finan- cial institutions. Congress has occasionally weighed in on the issue. Senators Mark Warner (D-Virginia) and Bob Corker (R-Tennessee) proposed the Housing Finance Reform and Taxpayer Protection Act, one of the first major bipartisan legisla- tive proposals for housing finance reform, envisioned a 10% capital requirement. The Urban Institute estimates that a level of 4-5% would have adequately sustained the GSEs through incurred losses from the financial crisis. Regulators need to agree on the appropriate capital level in order to finalize a risk-based capital rulemaking. This critical step "needs to be finished before there's an exit," Calabria told Politico earlier this year. 04 Charter New Guarantors S everal proposals for housing fi- nance reform, including Senate Banking Committee Chairman Mike Crapo's (R-Idaho) outline and the Mortgage Bankers Association's white paper, have suggested priva- tizing the GSEs and allowing new additional private guarantors to compete with them. The inclusion of this priority in the White House's memo reflects a shared interest in pursuing an expansion of the number of mort- gage guarantors. Legislation would be required to provide FHFA with the authority to issue charters to new guarantors. A new chartering authority would allow FHFA to move away from Fannie Mae and Freddie Mac's current duopoly. Calabria said, "When it comes to housing, competition would make the system more stable. If there were 10 GSEs instead of two, it's unlikely any of them would be 'too big to fail.'" 05 Curtail the GSE Footprint R ight-sizing Fannie Mae and Freddie Mac's collective footprint in the housing market has been one of FHFA's primary objectives since conservatorship. This is also one of the only linger- ing reforms not addressed by the Dodd-Frank Wall Street Reform and Consumer Protection Act's (Dodd-Frank) mandate to end "too big to fail." Reigning in the GSEs' market share is contingent on the successful execution of some of the other objectives laid out by the White House, including reevaluat- ing multifamily market participa- tion, the Qualified Mortgage (QM) patch, and affordable housing. There are several avenues that FHFA could pursue to reduce the GSEs' current origination volume directly. Eliminating or reducing participation with certain prod- ucts, including larger loan sizes, investor or second homes, and cash-out refinances, is a commonly discussed option to cut down market share tactically. Some of these products arguably do not serve the GSEs original mandate and make up nearly one-third of their total volume (cash-out refinances accounting for 20% and second homes accounting for 10%). FHFA also can reduce GSE loan limits to curb the concentra- tion of larger balance mortgages, but this step would likely require amendments to the Housing and Economic Recovery Act (HERA). Raising g-fees or tightening credit underwriting requirements is another viable alternative for motivating new competition from PLS securitizers and curtailing GSE volume. 06 Choose the Appropriate Size of Retained Portfolios T he retained portfolios of Fannie Mae and Freddie Mac have been gradually reduced under the direction of FHFA since conser- vatorship. The senior preferred stock purchase agreements (PSPAs) between Treasury and the GSEs es- tablished a schedule for 15% annual reductions in retained portfolios. The PSPAs also instituted a $250 billion cap that became effective this year. Both Fannie Mae and Freddie Mac are working on ex- ecuting FHFA's approved retained portfolio plans to maintain the cap, even under adverse conditions. Through these actions, FHFA has reduced the volume of mortgage purchases for investment while maintaining securitization volume. Under conservatorship, FHFA has specifically focused on the reduction of riskier retained mort- gage portfolios, which were down to $484 billion by the end of 2017,

Articles in this issue

Archives of this issue

view archives of TheMReport - MReport August 2019