MReport March 2017

TheMReport — News and strategies for the evolving mortgage marketplace.

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60 | TH E M R EP O RT SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T KBRA: Don't Remove Government Backing from Mortgages The private market would not step in and fulfill the void left by the GSEs if they were completely privatized, KBRA says. N early every stake- holder on both sides of the political aisle agrees that the government's eight-years-long- and-counting conservatorship of Fannie Mae and Freddie Mac should end. They just can't agree on how it should end. Various theories exist as to the best way to end the con - servatorship. Many papers have been published on the topic, and several legislative actions have been proposed in the last few years, though none have gained any significant headway. One school of thought says that privatizing the GSEs would be the best answer, suggested by Treasury Secretary Nominee Steve Mnuchin; another says that the best solution is to liquidate them, as suggested by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). Some have called for the GSEs to be recapitalized and released from conservatorship. Kroll Bond Ratings Agency (KBRA) in a paper titled, "Housing Reform 2017: Can the GSEs Be Privatized?" contends that government backing of secu - rities issued by the GSEs is essen- tial for the existence of a forward "to be announced" market which reduces lenders' interest rate risk and consumers' costs. "The privatization of the GSEs implies, in the short term at least, a significant decrease in the financing available to the U.S. housing market," KBRA Senior Managing Director Christopher Whalen wrote. "In the absence of a TBA market, no coupon would be high enough to support the entire range of demand for mortgage finance, only pockets of higher quality loans as with the jumbo mortgage market today." The mortgage market in the United States is worth approxi - mately $10 trillion, about half of which is held by large commer- cial banks. Non-banks account for the rest, but they would be marginalized without a TBA market to hedge interest rate risk, according to KBRA. "While privatization may seem desirable in terms of protecting taxpayers, the functional reality is that the GSEs today perform functions that the private markets are unwilling to provide, at least at current levels of mortgage interest rates and equity returns," Whalen said. "[T]he GSEs take market and credit risk that private investors have so far been unwilling to bear. With respect to the credit risk, today there is no significant market for taking first loss risk on single family mortgages other than prime loans held in portfolio on the balance sheets of depository institutions." KBRA contends that if the GSEs are privatized, non-banks would be unable to fund the pro - duction of residential mortgage loans unless the United States adopted the mortgage model used in Denmark, which features 100 percent variable rate notes. Unless the United States moved to the Danish model with 100 percent variable rate notes, no nonbank could fund the produc - tion of home mortgages effi- ciently, and commercial banks are unlikely to pick up the slack for the reasons discussed above. If non-banks are removed from the mortgage loan equation, com - mercial banks would be unlikely to move in and take their market share, according to KBRA. We invite all leaders in the mor tgage industr y to the second annual Five Star Institute Diversit y Symposium hosted on May 11 in Dallas, Texas. This will be a day-long event featuring keynote addresses, roundtable discussions, and panels covering topics in strategic and responsible lending, inclusive leadership, supply-chain diversit y, unconscious bias, and many more. For more information including registration, full agenda, and speaker line-up, visit Diversit or contact BREAKING DOWN BARRIERS. INFLUENCING AN INDUSTRY. MEMBERSHIP SPONSORS: MEDIA SPONSORS: PROPERTY SERVICES LUNCHEON SPONSORS: BREAKFAST SPONSOR SANDRA THOMPSON Deputy Director of the Division of Housing Mission and Goals Federal Housing Finance Agency DWIGHT ROBINSON SVP Human Resources and Chief Diversity Officer Freddie Mac Don't miss the opportunity to hear from the 2017 Five Star Diversity Symposium keynote speakers THE 2017 FIVE STAR DIVERSITY SYMPOSIUM MAY 11, 2017 | FAIRMONT HOTEL | DALLAS, TEXAS

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