MReport March 2017

TheMReport — News and strategies for the evolving mortgage marketplace.

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TH E M R EP O RT | 15 COVER STORY privatizing the GSEs, in total or in part, hinge on sovereign sup- port. No matter what privatiza- tion proponents claim, Whalen says there is a component to the plan that looks to the Treasury to take the ultimate hit should a new disaster loom. Testing the Waters V arious ideas about what should be done with the GSEs are floating about. There are ideas about changing the duration of mortgages from 30-year fixed to maybe 20- or 25-year fixed with more substan- tial prepayment penalties. There are plans to introduce floating- rate mortgages like Denmark has done. There are proposals to privatize the capital infusion into the mortgage market itself. But all of them do seem to mention that if private capital fails to buoy a mortgage and securi - ties market, the federal govern- ment would have to step in. For Whalen, this is part of the have- your-cake-and-eat-it-too wish that shareholders would find highly agreeable. It would, after all, eliminate risk and exponentially ramp up reward. Even from within the administration, the privatization conversation is, so far, a lot of speculation and general ideas. But privatization efforts in other areas do offer a chance to test the waters, to a degree. For doomsayers who feel that turning over a massive financial endeavor to private investment would only succeed in making interest rates soar, leading to foreclosures, and leaving already-wealthy investors with cash spilling out of their pockets as everyday Americans lost their homes, there are examples like Chicago's $1.2 billion effort to privatize its parking meters. That was disastrous enough for the Chicago Tribune to call the attempt "an epic fiasco" last summer. For privatization plans to work, there are examples like the public-private partnership Indiana set into motion for its toll roads. That highly successful $3.2 billion endeavor worked largely because of a long discussion and thought - ful approach before implementing anything. The careful approach is a good starting point for something as far-reaching and complex as mort - gages, yes, but it does bring up the all-important issue of timing. The administration has no short- age of major issues to contend with, from immigration policy to Obamacare. This, Whalen says, puts the pri - ority of housing reform lower on the list. Rood says that unless the administration could get to this in the first year, it could turn into a to help lenders succeed in a purchase money market. But the cost will be most taxing to affordable housing. If sales drop off, it would dampen the whole industry. Bon Salle reminds us that neither Freddie nor Fan- nie control interest rates, though they do have some input into the mortgage rates borrowers pay. "For us, rates have different impacts in the market," he said. "When rates go up, for example, refinancing slows, less refinancing transactions are happening." This kind of dynamic, he says, shifts the profile of originations. In this example, the ratio or mix changes as purchase mortgages increase and refi originations decrease. Something else to keep in mind, Bon Salle says, is that rising interest rates are a sign of a healthy market. "Interest rates typically go up because the economy is doing well," he said. "With a growing economy, you also have wage growth, and that's ultimately a good thing." The Rising Cost of Doing Business A primary focus of Freddie's single-family business, Lowman says, is "removing pain points" for con- sumers and for lenders. Thanks to the slew of regula- tions enacted as a response to the meltdown, the cost of simply doing business in the lending and mortgage sphere has increased considerably in recent years. Freddie Mac, Lowman says, began in 2014 to look for ways to solve that very issue. The latest incarna- tion of how to help lenders is a suite of products called the Loan Advisor Suite that helps lenders at each stage of the loan process. Loan Product Advisor, for example, assesses borrowers and helps evaluate their qualifications for receiving loans. This product is already in lenders' hands and has generated over- whelmingly positive feedback, Lowman says. There are also programs in the suite like Loan Col- lateral Advisor, which helps evaluate property values; Loan Coverage Advisor, which helps keep track of rep and warranty; and Loan Closing Advisor, which helps lenders comply with the Uniform Closing Dataset. These ideas came from inside Freddie Mac, Lowman says. He is a veteran of several large financial firms— including Prudential, JPMorgan Chase, and Citi—and he says that whenever possible vendors from outside the consumer-lending world came to one of those companies with a solution, it was never something that could be easily implemented. From inside, knowing the market and its business, he says, Freddie has devised programs aimed at providing certainty that loans pass muster and help streamline time and costs. Bon Salle says Fannie Mae's strategy is centered on creating simpler, better customer service at all levels of a mortgage transaction. The customer has spoken, he says, and has demanded that the process of getting a loan be made simpler. In response, Fannie introduced its Day One Certainty program last year. He calls the initiative "a major step forward in helping our customers transform the mortgage origination process." At its core, Day One Certainty shrinks the time it takes to qualify someone for a loan—in many cases, from days to minutes. The program "provides customers with freedom from rep and warrants on income, assets, and employment that have been validated by Desktop Underwriter and on appraised property value where the appraisal has received a qualifying score through Fannie Mae's Collateral Underwriter system," Bon Salle explained. The program also includes property inspection waivers, which waive the appraisal requirements on certain lower-risk refinance transactions and overall helps lenders make more informed and more far- reaching decisions. Bon Salle says the program, born of competition to make better products, "de-risks the mortgage process" for lenders. Proving Their Worth T he GSEs may or may not be on the chopping block, but if they get there, Lowman says, Freddie Mac will present its performance under conservator- ship as evidence of its value to the marketplace. For one thing, he says, there is the CRT aspect. Freddie Mac reported that it transferred $8.4 billion in poten- tial credit losses on nearly $215 billion of single-family mortgages to private market investors across four single-family credit risk offerings in 2016. And it has transferred risk on approximately $602 billion in single-family mortgages since 2013. This, according to Freddie, "provides approximately $25 billion of loss protection to American taxpayers." Another thing Freddie is doing is developing a pro- gram to follow in the success of the Home Possible mortgage program as well as other programs (like Loan Advisor Suite) to help borrowers and lenders. There's also the in-place business sensibility at Freddie, Lowman says. Under the terms of conserva- torship, Freddie Mac's permitted capital reserve is cur- rently just $600 million and will reach zero by January 2018. That said, the company runs its business with the same discipline it would if it were managing to a strong capital regime, which helps it make sound decisions. Bon Salle says the key for Fannie Mae staying competitive is to keep listening to the customer. "We ask ourselves, 'As a secondary market partner, how do we provide our customers the tools to improve the mortgage origination process and deliver a valuable experience to homebuyers?'" He adds, "We bring global capital to the United States. We provide inexpensive, large-scale access to liquidity to allow people to buy and sell their homes."

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