GSEs, IMB Execs Ponder Future

PALM SPRINGS, CALIF.–Fannie Mae and Freddie Mac have now entered the ninth year of their conservatorship under the Federal Housing Finance Agency–a scenario that no one envisioned.

“The GSEs hang in the balance,” said MBA Chairman and CEO Rodrigo Lopez, CMB. “Over the past four years, MBA has called for reform that preserves as much of the GSE platform as possible. We must make housing reform an essential part of the future for homeowners.”

“MBA has been at the forefront of GSE reform,” said MBA Vice Chairman Chris George. “The conservatorship was never intended as a full time solution. And with a new Administration and a new Congress, we have an opportunity to move the process forward.”

Last year, MBA convened a Board or Director-level Task Force to examine the future of the GSEs and offer recommendations for GSE reform. The Task Force is expected to release its findings next week.

MBA has long-called for the following provisions:

–Long-term conservatorship is not a healthy end-state for our housing finance system.
–MBA urges Congress to move forward on thoughtful, comprehensive GSE reform legislation that focuses on certain core principles:
–An explicit federal guarantee for mortgage securities to promote liquidity and stability, and ensure that U.S. mortgage markets remain connected to global capital through all economic cycles.
–Protection for taxpayers through deep credit enhancement that puts private capital in a first-loss position, backed by a Federal Deposit Insurance Corporation (FDIC)-like federal insurance fund in the event of catastrophic losses.
–A single, highly liquid security delivered through a common securitization platform that provides an efficient means of hedging interest rate risk through a robust To Be Announced (TBA) market.
–Preservation of key GSE infrastructure – technology, systems, data and people – by transferring them to any new or reconstituted entities created by GSE reform.
–Equitable, transparent and direct access to secondary market programs for lenders of all sizes and business models.

“Primary capital should assume most of the risk, not the taxpayers,” Lopez said.

David Lowman, executive vice president of single-family business with Freddie Mac, McLean, Va., said despite the conservatorship, Freddie Mac is operational, profitable–and competitive.

“We like competing with Fannie Mae,” Lowman said here at the MBA Independent Mortgage Bankers Conference. “We are perceived as a ‘duopoly,’ but in reality we are two very different companies serving the same market. “It’s first and foremost for us to understand the risk we take in the marketplace. And we want lenders to be comfortable with those risks.”

“We call it ‘controlled competition,” said Andrew Bon Salle, executive vice president of single-family business with Fannie Mae, Washington, D.C. “Last year was an important year for Fannie Mae and its customers; the introduction of Day 1 Certainty and other products helped bring down risk.”

For 2017, Lowman said Freddie Mac is making considerable investments in its product suites. “Working with Fannie Mae and FHFA, we’re working on finishing the Common Securitization Platform. The next big wave is to get to the Common Security. We have whole armies of people working on this. And we are also working on the credit risk transfer market…we are continuing to test and learn.”

“We want to be a better partner with everyone in the industry, Bon Salle added.

Lowman and Bon Salle see several headwinds going into the new year. “We’re all looking at where rates go,” Bon Salle said. “That is going to have an impact on everyone. With that, this idea of the market profile will change, from a refi market to a purchase market.”

“Rising interest rates are always bad for the market,” Lowman said. “The shock that it provides and how that affects business is top of mind. Business liquidity is also an issue that we are carefully monitoring. We know that the regulatory environment is changing; we have a new Administration and that is going to force us to react and adapt.”

Higher conforming loan limits will not have any noticeable impact on GSE business, both executives agreed. “A 1.7 percent increase is not going to change things much,” Bon Salle noted.

Both executive said they will take a wait-and-see approach to GSE reform efforts. “One can argue that a lot of reforms have taken place under the conservatorships,” Lowman said. “The next year will involve us providing a lot of education to all the stakeholders in the process.

For independent mortgage banking executives, the relationship with Fannie Mae and Freddie Mac is an important part of their business.

“We all know that without question, the independents are extremely dependent on the GSEs,” said Peter Norden, CEO of Homebridge Financial Services Inc., Iselin, N.J. “Without the government involved, our business would be very different. Without private capital making a serious inroad, we will continue to work with the government agencies for a majority of our business.”

“Fifty percent of our business is with the GSEs,” said Philson Lescott, COO and chief digital officer with NOIC Inc., Westerville, Ohio. “The infrastructure that the GSEs provide is important for a small lender like us. It gives us choice and enables us to level the playing field.”

“I started in this business when I was 16 and I thought Fannie Mae was a girl and Freddie mac was a guy,” quipped Patricia Arvielo, president of New American Funding, Tustin, Calif. “They are true partners, which is important as our business focuses on working with the underserved markets.”

Norden said while both GSEs have made efforts to simplify processes, they could do better. “Getting things changed in this business can take forever,” he noted.

Homebridge is in the process of acquiring the assets of Prospect Mortgage, which will turn the company into a $20 billion operation. “Assimilating these two operations has been a significant challenge,” Norden said. “The match was pretty good from a purchase perspective. And as interest rates rise–as they certainly will–the cost of running this business and the cost of processing a loan has skyrocketed. Adding mass, we decided, was a good way of reducing costs and remaining profitable.”

Arvielo, on the other hand, is looking at things differently. “Five years ago, we were just a call center,” she said. Since then, New American has grown one of the largest retail operations in the western U.S. “I like that we did this organically,” she said. “We are completely focused on purchase in the outside channels, so I’m hopeful that we will continue to grow.”

“We have always been a purchase shop, so it’s not going to be a major shift for us as the market changes,” Lescott said. “What we are focusing is how we work with our customers. One of the things customers are really getting excited about is the transparency that we can provide them. We developed a platform for our consumers that enables them to control the process.”

Norden said he’s concerned about the fate of IMBs going forward. “The smaller guy with little capital is going to have a tough time going ahead,” he said. “Cash flow is the most important part of your business. If you have a negative cash flow, you’re going to be out of business. The dwindling refi market is going to put a crunch on all of us.”

“As an independent mortgage banker, recruiting and retaining the right people is important for our evolution,” Lescott said. “It’s often easy for us to sit back and think that digitization won’t affect us, but it will. You have to have the right platform in place.”

“Empowerment is the key word,” Arvielo said. “About 30 percent of our business is with the Latino population. There are a lot of niche populations who want to own a piece of America. It’s imperative that you know your underwriting operations like the back of your hand.”