David H. Stevens
President and CEO at Mortgage Bankers Association
Setting the Stage for Sustainable Real Estate Liquidity
Right now the
real estate finance market is recovering. However, when the refinance boom,
driven by record low rates and extraordinary government intervention, ends,
liquidity will diminish and the overall mortgage finance volumes could slow
significantly.
Refinance originations are anticipated to decrease nearly 30
percent in 2013 and another 56 percent in 2014 as mortgage rates increase and we
shift to a more purchase dominated market.
Additionally, an oversized and outdated federal government
role (90% of all loans made today are backed by Fannie Mae, Freddie Mac or the
Federal Housing Administration) is holding back a return of private capital in
the marketplace.
The move from a mortgage market dominated by the government
to one where private capital plays the primary role is a difficult one because
any hiccup or misstep in the transition could grind the market to a halt,
restricting economic growth and tightening access to affordable mortgage credit
even more than what we have already seen.
We need to act now to manage that transition while market
conditions are favorable.
Both of the government sponsored enterprises (GSEs) — Fannie
Mae and Freddie Mac — have reported large net operating revenues, leading some
to wonder whether retaining them is the easiest solution now that the housing
market is recovering.
I completely disagree.
The reported profits at the GSEs are the sole result of the
capital the US taxpayers have injected into the two companies, unprecedented
government intervention in the mortgage markets and the increases of guarantee
fees (g-fees) and other price increases mandated by the GSEs’ regulator , the
Federal Housing Finance Agency (FHFA) — not to mention a pattern of repurchase
demands and indemnifications that is far outside historical norms and is in
place only due to the lack of competition from other investors.
There is great consensus among industry leaders, economists
and Washington politicos that transitioning Fannie Mae and Freddie Mac out of
conservatorship must happen. This week, the American Enterprise Institute
assembled a panel to discuss this very topic. All on the panel agreed
that Fannie and Freddie monopolize the secondary mortgage marketplace, charging
lenders extremely high g-fees that are passed onto consumers and yet are still
squeezing out private competition.
There was also broad agreement that the government footprint
is too large and with markets stabilizing, now is the time for the return of
private capital into the marketplace and that Fannie and Freddie’s outsized role
creates unbalance and instability within the financial markets, limiting growth
of smaller, private institutions.
That’s great, right? We all agree that transition must
happen. Unfortunately, that’s where the agreement ends and the Washington
stalemate begins.
Major differences exist from this point forward. How should
the GSEs transition? What should the government’s role be in real estate
finance? What does the transition end state look like?When should we transition?
Should transition begin now or should we wait until there is perfect alignment
on an end state? Experience shows that if we wait for perfect alignment, it will
never get done.
The bottom line is this: There must be a clear path to
transition to a new secondary market structure, one that looks beyond current
GSE earnings or conservatorship. But rather than wait for a plan for what that
final structure might look like, there are steps we can and must take now while
market conditions are optimal to achieve this goal.
First, FHFA must move toward a common security structure for
Fannie and Freddie in the TBA market.Second, FHFA can bring more private capital
into the mortgage market now by mandating that Fannie and Freddie accept lower
guarantee fees for deeper credit enhancements such as private mortgage insurance
at deeper attachment points or other risk sharing arrangements.
Finally, FHFA must redirect the GSEs; single securitization
platform initiative so that it serves the needs of the broad securitization
market of the future, including the GSE's, and this work must be done with the
private sector providing guidance and direction.
From an interest rate perspective, the opportunity to
capitalize on transition will never be more advantageous than now, while rates
are at historic lows and large refinancing volumes are adding to liquidity. Over
the next year, rising rates and fading refinances will reduce overall mortgage
activity and impair market liquidity. Thus taking action during today’s more
liquid conditions is preferable.
Given the path of housing starts and home sales, purchase
originations are projected to increase 17.7 percent in 2013 to $592 billion, and
another 18.8 percent in 2014 to $703 billion. With the GSE supremacy in today’s
housing market, if nothing is done, Fannie and Freddie will continue to edge out
private competition. Endless conservatorship is not a sustainable option nor is
returning Fannie and Freddie back to their original state. A strong, sustainable
secondary market must be built on private capital, with a limited government
guarantee to ensure liquidity in all market conditions.
These are just the first steps toward a vibrant, competitive
real estate finance system of the future. This plan will lower costs to
consumers, boost liquidity in real estate finance and reduce taxpayer risk
inherent in today’s market. It requires no Congressional action and can begin
right now drawing down the government dominance in the marketplace.
This is the right plan at the right time.
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