How Much is Too Much? Execs Discuss Role of Government in Secondary Market

NEW YORK–It’s a perpetual question these days: is the federal government too involved in the secondary market, and what can be done to attract more private capital?

“For real estate finance executives, the secondary market affects how we do business and how we plan for the future,” said Mortgage Bankers Association Chairman Bill Emerson here at the MBA National Secondary Market Conference & Expo. “The government maintains a significant presence in the real estate finance market–FHA, Fannie Mae, Ginnie Mae. The real question is, what should the level of involvement be?”

Stanley Middleman, CEO of Freedom Mortgage Corp., Mt. Laurel, N.J., said right now the government is the “whole enchilada”–and that’s not such a bad thing.

“I’m a big proponent of the government programs as a market participant; with the price of credit and price of access to credit, without government support it wouldn’t be there,” Middleman said. “The government is probably providing a 2-3 percent discount to people who are looking for credit.”

Having said that, Middleman added, “you can’t look backwards and say that the explicit government guarantee didn’t make a difference. Without it, the housing environment would have been far different, and very scary…sometimes it comes down to us making a choice–what is the appropriate level?”

Smriti Popenoe, executive vice president and co-chief investment officer with Dynex Capital Inc., Glen Allen, Va., said there’s a role for government; but it depends on the circumstances.

“We need to step back and say, do we really need the government this involved, or can private capital step back in?” Popenoe said. “Freddie and Fannie have been pricing credit for 20-30 years…There has to be a long-term perspective on how much involvement they need to be in. We can’t do this with just the government. We have to have private capital that is willing to make the risk for 20-30 years.”

Thomas Wind, president of U.S. Bank Home Mortgage, Minneapolis, expressed concern over regulatory overreach. “If there’s a blip, what happens?” he said “If a regulation causes a market aberration, how long does it take to correct that and how does it affect the market for the long term?”

“The regulatory environment has been a huge barrier to re-entry of private capital,” said Thomas Esposito, group vice president with M&T Bank Corp., Buffalo, N.Y. “It’s scaring a lot of people out of the market.”

William Godfrey, executive vice president of capital markets and risk management with Mason-McDuffie Mortgage, San Ramon, Calif., noted the San Francisco Bay Area–which has some of the highest home prices in the country and, subsequently, a minimal involvement from the government secondary market-scrambling for cheaper alternatives for private capital.

“If you look around the San Francisco area, everything is transitioning to smaller housing,” Godfrey said. “With the changes in the regulatory side, there is a divergence away from the stuff we used to do and it’s affecting the way we go forward. Lenders want to make smaller loans and borrower want smaller loans.”

Middleman said the industry has to “grow up” to drive change. “We are seeing a sea change going on in the servicing industry right now,” he said. “We need to work a lot harder in the age of mortgage servicing rights and new ways of providing capital and a new generation of customers.”

Liquidity is a huge issue, Popenoe said. “I’m more concerned when the Fed does not raise rates,” she said. “It’s a tougher environment for companies that want to see a better risk environment…is the Fed raising rates a concern? Yes. But not raising rates is also a concern.”

So, what needs to happen? “To be competitive, the private market would have to trade senior securities very conservatively,” Wind said. “And that’s going to be difficult because of TRID and other regulations.”