In prepared remarks for a speech before the Mortgage Bankers Associations 2013 Secondary Market Conference on Monday MBA CEO David H. Stevens called for changes to the housing finance system that would result in a single security, a new risk sharing structure, and redirection of the Federal Housing Finance Agency's (FHFA) platform initiative.
Stevens said that Washington has created an atmosphere where mortgage guarantee fees have been arbitrarily raised and used as an offset for other budget items, government is backing most of the mortgage market and directly impeding the return of private capital, and where it has become already to change housing policy and regulations without transparency or involving the industry. "This is an atmosphere where the collective actions have produced an outcome that no longer favors vibrant, diverse business models. To the contrary; these actions are actually hurting the goal of a broad and diverse industry. This is not okay."
Stevens congratulated Fannie Mae, Freddie Mac (the GSEs) and their staffs for the job they have done in "keeping the mortgage market afloat", but said it is time to transition from conservatorship to a future state and time for private capital to reemerge.
While the GSEs are now showing profitability those profits and causing discussion in some sectors about reconstituting the GSEs, profits don't tell the whole story, he said. Profitability has been dependent on three things, the unilateral power to raise guarantee fees, a wave of refinancing brought about by government programs, and the extended period of record low rates.
The willingness of FHFA to act unilaterally to chart the future course of the GSEs and to impose or propose major policy changes (minimum net worth requirements, G-fees, the securitization platform, volume limits, a new framework for reps and warrants) may make it only a matter of time before they significantly limit congressional options for permanent reform.
This is the time to act - especially as from an interest rate perspective the opportunity to capitalize on transition will never be more advantageous. Over the next year, fading refinance volume will reduce overall mortgage activity and impair market liquidity. Taking action during more liquid conditions is preferable.
Stevens said there are many steps that must be taken to build a real estate finance system for the future and Congress must do its part by moving a GSE reform package and restoring a greater balance in housing finance. But there are steps that can be taken outside of Congress.
First, it is imperative that the White House name a Housing Policy Coordinator. Second, FHFA and the GSEs must stop making market-shifting decisions without the input of consumers or the industry, and third, there must be a clear path to exit conservatorship. To achieve the last goal requires a move toward a single security, additional risk sharing by the GSEs and redirecting the FHFA platform initiative.
Stevens said that MBA has been at the forefront advocating that FHFA and the GSEs, modify the Freddie Mac PC to mirror the structure of the Fannie Mae MBS and that these securities be considered fungible for TBA delivery. "Any future state requires a common currency. This is fundamental to virtually every GSE proposal - greater standardization in the security is necessary in order to maintain liquidity" He pointed out that on a typical day Fannie Mae MBS trade at ten times the volume of the Freddie Mac PC security. By making MBS the common currency liquidity can be enhanced, costs reduced, and the groundwork laid for a more competitive and efficient secondary market.
The vast majority of the price differential between the two securities is due solely to liquidity. Once that is equalized prices should converge to something very close to the current Fannie Mae level and some sort of exchange should be offered for investors who want to swap old for new.
The fact that the GSE net income is being fully swept to Treasury provides an opportunity to pay for this change and should eliminate objections for any reason other than competitive advantage concerns. The ongoing taxpayer subsidy, the timing based on the current liquidity environment, and the GSEs' record earnings all support the imperative to resolve this issue now, Stevens said.
To further encourage private capital Fannie Mae and Freddie Mac should be required by FHFA to accept pools with deeper levels of credit enhancement, and provide bona fide off-setting reductions in guarantee fees. The GSEs are now charging G-Fees that are more than twice as high compared to just a few years ago while taking on very little credit risk. Allowing deeper levels of credit enhancement would encourage private investors to invest more, reduce the government's exposure to risk, and lower guarantee fees to lenders, ultimately to the benefit of borrowers.
The new risk structure should encompass various LTV thresholds to enable different credit enhancement structures to enter the market. Private capital would be in the first loss position and with multiple credit enhancement structures possible, the government would take on less risk than today.
Turning to the recent FHFA announcement of a planned common security platform, Stevens said MBA is concerned that it is a major undertaking and the private sector has extensive experience in systems development of this size and will likely bear the brunt of any mistakes or delays in getting the platform operational. If constructed well, with industry input and ownership, a central platform could provide a significant benefit in terms of an efficient and standardized process. But if put together too quickly without sufficient stakeholder input, it could be a costly endeavor that cements in today's marketplace and unintentionally blocks competitors in the space. "We should insist on a process that requires industry involvement," he said.
The steps MBA is proposing, have benefits for lenders that are large and real, and costs that are minimal to non-existent.
- Moving to a single security will increase liquidity in the market which will benefit everyone, and under current market conditions including the Fed purchases, the transition costs are easily manageable.
- By offering lower G-fees (or LLPAs) in exchange for deeper credit enhancements, lenders are once again able to have more control over managing the credit risk of their deliveries to the GSEs. Lenders would still be able to deliver under the full G-fee structure, this would be providing them an option, and options have value.
- Finally, lenders should have a direct role in influencing the direction of the platform. More input from industry will result in a better product.
The beauty of this plan, Stevens said, is that it can be done outside the halls of Congress. It can and should be done now while the risk to the marketplace is minimal; he promised to deliver the plan personally to FHFA in the hopes of generating greater momentum toward transition.
