TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/792861
14 | TH E M R EP O RT COVER STORY The Impracticality of Privatization A word thrown around frequently when consider- ing the Trump administration's potential effect on the GSEs is privatization. This, of course, is what Mnuchin started off advocating for and then quickly backed away from soon after. From most standpoints, it seems that wholesale privatization of Fannie and Freddie is a practical impossibility. Also, it would take an act of Congress, which isn't entirely out of the question, but it would certainly nullify any chance of swift action. "The idea of a private GSE is a misnomer," said Michael Bright, Director of the Center for Financial Markets at the Milken Institute in Washington, D.C. He says the idea of privatizing the mortgage market and shutting down the GSEs or of reform - ing the market by reforming the GSEs makes at least some kind of procedural sense to him. But privatizing the GSEs themselves? "I don't even know what that means," he said. "There's nothing private about the GSEs." Indeed, the GSEs, chartered by Congress and backed by the Treasury, are not private compa - nies and are not run like private companies. So the idea that Trump or even Congress could privatize the enterprises whole- sale, Bright says, is, charitably put, impractical. "Not only is it terrible policy, but I don't see how they could pull it off," he said. Daryl Jones, Director of Cornerstone Advisors in Indianapolis, agrees. "There are a lot of moving parts to this," Jones said. "This is not a flip-of-the- switch kind of issue." The largest moving part is the government backing (i.e. the full faith and credit of the United States that makes sure the housing market can be saved from utter and irreparable ruin). For Whalen, this is the back - bone of the argument as to why privatization is what he calls "a ridiculous idea." It takes the full faith and credit of a sovereign nation to withstand the potentially seismic repercus - sions of another mortgage market meltdown, Whalen says. One of the reasons the crisis happened in the first place is that busi - nesses were not well regulated by the government. And despite how terrible things got when the meltdown settled in, imagine how much worse things would have gotten if there was no backstop there to absorb the debt. Only a sovereign, he says, has that kind of wherewithal. Fundamentally, all the plans and all the ideas that involve Straight from the Source The heads of single-family business at Freddie Mac and Fannie Mae discuss their mission as it is and as it could become under new leadership. O ne of the hottest topics these days involves whether to release Freddie Mac and Fannie Mae from conservatorship. The speculations and opinions are as varied as the possibilities, but we wanted to know how the government-sponsored enti- ties (GSEs) see their roles in this postcrisis, potentially preprivatized world. So we went straight to the source. The MReport spoke with David Lowman, EVP for Sin- gle-Family Business at Freddie Mac, and Andrew Bon Salle, EVP for Single-Family Business at Fannie Mae, about how the GSEs see themselves as businesses, competitors, and allies in the housing sphere. Competition vs. Cooperation L owman says Freddie Mac has "brought formidable competition to the marketplace over the last couple years" by expanding lender options and introducing new ideas like the credit risk transfer (CRT). Freddie actually has lead the industry on CRT, a move born of the financial crisis that shifts a large chunk of mortgage credit risk from Freddie itself and from the Treasury to investors, much like an insurance company would do. "We have the goal to be the best credit guarantor," Lowman said. "We don't take the customer for granted." And competition with Fannie has proven to be a good thing for both companies and for lenders and consumers as well. The duopoly has led each entity to come up with ideas that would likely not have hap- pened under a monopolistic business model. Bon Salle says he views competition under conservatorship as "controlled competition." He says Fannie and Freddie have a long history of compet- ing in the secondary market, mostly centering on customer service. "Our conservator, the FHFA, does not want us to compete on price or on credit," Bon Salle said. Still, like Lowman, Bon Salle says competition is good for both companies, as it compels each to come up with new ideas and new solutions to a changing marketplace. What If: Missions Under Privatization S hould a wholesale or partial privatization measure come into play, Freddie's mission would only change if it were for some reason stripped of its affordable housing objectives, Lowman says. "Then how we would do business would change, but the odds of that happening are really low," he said. Lending to underserved constituents "is a key part of what we do," Lowman says. In fact, low-income purchase originations that qualify for the company's statutory affordable housing goals make up roughly 24 percent of what Freddie does. The low-income goal is one of several goals set for the GSEs by FHFA. Freddie doesn't loan directly, of course, but its products to low- and moderate-income borrowers are growing in popularity, he says. Bon Salle says it would be rather difficult to try and guess the future. If the future calls for new objec- tives or new direction from different shareholders, he says, Fannie would do what it needed to do to meet new objectives. Dealing with Rising Rates W hether interest rates rise as an outcropping of some kind of reform measure or as part of the natural evolution of the market is immaterial, Lowman says. What matters is, interest rates already have risen after a long period of historically low rates, and if they stay put or rise further, it will be something Fred- die and Fannie will have to contend with. "Higher interest rates have had a pretty profound impact on the business already," Lowman said. Under the extremely low rates that existed postcrisis, large amounts of borrowers got to purchase or refinance. And now that rates are up, fewer will have the opportunity to refinance simply because it costs more money now. Lowman says the refinance market is 20 to 40 percent slower than it was at its peak during the low-rate years. That's significant: In 2016, Freddie issued $456 billion in mortgage funding, and 60 percent in Decem- ber went toward refinancing. This, he says, means Freddie will do everything it can √ Fannie Mae's Andrew Bon Salle and Freddie Mac's David Lowman