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STRATMOR’s clients, and rightly so, are often focused on the details of the loan origination process. Those with the lowest cost to produce and who provide a positive borrower experience will eventually win out, and lenders with the ability to save a basis point here or there will succeed. But STRATMOR knows that successful management teams also need to be aware of what is transpiring outside of their shops, and the industry was reminded of this at the recent Mortgage Bankers Association annual conference as, once again, the GSEs (most notably Freddie Mac and Fannie Mae) were the focal point. What are regulators and politicians saying about the secondary markets that will eventually impact the primary markets?
The Federal Housing Finance Agency (FHFA, which oversees Fannie and Freddie) released its annual “Scorecard” for the two Agencies outlining the goals its regulator will use for judging their performance in 2020. There was a new section in a document that in most years tends to be boilerplate: “Prepare for transition out of conservatorship.” Lenders know, however, that the list of Federal Agencies that eliminated their own agency is short, some would say non-existent, so that is important to keep in mind going forward.
In his recent speech before the annual convention, FHFA Director Mark Calabria observed that the GSEs are “undercapitalized for their size, risk and systemic importance.” Of course they are: Up until a recent agreement their profits flowed into the U.S. Treasury Department. Its recent earnings showed that Freddie Mac’s net income fell 37 percent in the third quarter, but Freddie still earned $1.8 billion, which it can now keep, bringing its capital reserve to $6.7 billion. Keep in mind that Calabria signed an agreement with Steven Mnuchin, secretary of the Treasury, that allowed Freddie Mac and Fannie Mae to retain up to $45 billion in combined capital as they prepare to leave conservatorship. That meant Freddie could keep the $1.8 billion.
It may take a few years of earnings for the two of them to hit $45 billion in capital. So the GSEs will be undercapitalized still, but less so than before. Calabria noted that the FHFA continues to vet potential financial advisors “that can provide needed expertise to evaluate different capital raising options and help chart a roadmap to responsibly end the conservatorships.” That is good news for lenders in that those believing that Freddie and Fannie would be coming to an end are wrong, and in fact both agencies will be striving to help lenders help their borrowers.
The FHFA made it clear there is no policy-setting role in that endeavor for the GSEs. Both will conduct such activities as directed by FHFA arising from recommendations in the Treasury and HUD Reform Plans and develop and implement FHFA-approved strategies that ensure the efficient utilization of capital. Put another way, they will be run like any other business.
Recently the Treasury released a “roadmap” for housing finance reform that included steps to releasing the GSEs from conservatorship, “simplifying” the Qualified Mortgage rule and eliminating the so-called QM patch that allows Fannie and Freddie to sidestep some regulations, reducing “unnecessary regulatory impediments” for private-label securitization, and promoting private-sector competition.
Many of the recommendations in the 53-page plan don’t require input from Congress. (Most notably this is the seen in the agreement about capital retention.) And critics will tell you that why the plan currently favored is based on a misconception of the source of the GSEs’ dominance and would result in less access to mortgage credit, greater risk to the taxpayer, and no end in sight for the system’s reliance on a too-big-to-fail duopoly. Of course this is would not be disappointing to non-QM lenders and those that focus on FHA & VA production.
While regulators, politicians, and the media are conjecturing about the future of the GSEs, our clients can rest assured that a) both will be around, in forms very similar to what they look like at present, for a long time, and b) the residential lenders who strive for a low cost of production, coupled with continuous improvement of the borrower experience, will succeed regardless of product mix.
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Let us light up your strategy discussions.