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Additionally, an oversized and outdated federal government role (90% of all loans made today are backed by Fannie Mae, Freddie Mac or the Federal Housing Administration) is holding back a return of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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poojajolly P.
Student at xxxxx
same hear dear.......if u know any thing new pls share with me......thanks.
11h
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Frances M.
President at Employee Transfer Corporation
David, You hit the nail on the head. I totally agree with your assessment. Now if we can only get the Government to behave responsibly and plan appropriately we could get there.
21h
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Jim M.
Expert REALTOR,Managing Broker
I see this a s a positive thing for the economy while it may have a short term negative impact on me and my business. I wish other industry's reliant on the government could see fit to to the same.
23h
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Doug B.
Partner at Tate & Tryon, CPAs
Excellent article - written such that even a CPA can understand it!
1d
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Jeff Donnellan 2^nd
Realtor at Re/Max Vision
The last time the GSE's were wound down we had subprime and that nearly destroyed us all. The GSE's provide industry standards for loans and borrowers. While the paper work can be a nightmare, these standards have restored confidence to our marketplace and assurances to the banks that write the mortgages. The crash started because of risky borrowers, bad loans, and was further hidden by Wall Street tricks like "credit enhancements", over leveraging, and CDO's. I for one don't want Wall Street to gamble with my mortgage to satisfy their greed. If a standardized secondary market independent of the GSE's was formed it should be have considerable 3rd party oversight, & no gambling with mortgages.
1d
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Justin R.
Houseguy.org | Real Estate Investment Analyst
Todd, you are right We the Tax Payer, who is absorbing the risk of the Government Guarantee's are in a Catch-22. What do you do when you find your company in this position? You act, and you act with clear direction to get out to the situation as safe and painless as possible. Even thought pain in the form of financial instability, and probably loss are going to be a result, you still act. A slow "transition, is what they have tried to do for the last 5 years, has anything change? NOPE, just more profits for Government GSE, and higher fees to borrowers. Competition at the marketplace will allow for these Junk loans as well as the great loans. Will the Junkers sell for less because of their risk, probably. BUT with competition they may sell for more than expected. Acting now is a must, we are living a lie if we think there is security in this marketplace with an Monopoly running the show.
2d
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Andrea B.
Independent Real Estate Professional
There is not shadow inventory. The banks released 80 billion homes in Feb and March across the U.S. to 4 government created property managment companies. Our government is now making money renting at high rates while our invnetory for sale is at an all time low. Pay attention to the homes for rent in your areas and you will find the government in controll in this area as well.
2d
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Mohammed R.
Supervisor Stock Items Procurement at Saudi Arabian Airlines
Solving simple mathematical equations? Housing allowance for state employees+Housing allowance for private sector employees = May contribute to shred large solutions
2d
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Iain W.
Management Consulting Services and Collaborative Software
Hardly think it is recovering. More like another little bubble is emerging that will soon pop. People forget about all the shadow inventory the banks hold. The issue is that nothing has changed. The same players rehashing the same tired old game.
3d
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Susan Kahler 2^nd
Business Development, Financial Services
Please consider reviewing our white paper, PRIMARQ, the GSEs and FHA. Securing a mortgagee letter addressing the Primarq platform's unique structure lowering LTV/DTI and risk to the lenders (portfolio only for now) is a top priority of ours, and we could use your support. Please be in touch for a copy. Susan@PRIMARQ.COM
3d
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Anthony G.
Contract Developer at Eclipse Financial Systems Limited
The best thing that could happen to the housing market is money supply reform. See Positive Money UK for Full Reserve Banking solutions that would correct many of the distortions we're currently suffering.
4d
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Bert W.
Student at RCC
I think that real estate is still grossly overpriced, and the people that control most of the holdings in this country, public or private, could really give a care if your average person died of hypothermia in the winter. The job of the industry is to try and put some kind of roof over people's heads. What ends up happening though is that the whole thing ends up turning into a bank-owned investment bonanza.
4d
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Michael M.
Senior member of Technical Staff at Oracle
More self-interested pontification from a leading bankster. You're talking to your mates David. Everyone else has had enough of gouging, graft, gravy-trains, whatever phrase is used in your country. Property exists, not to provide playing tokens for the 1%'s games, but to provide comfort and shelter to the people. Remember that. Speculators and traders like you are just parasites.
4d
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Phillip , D.
Registered Echocardiographer, Visionary Investor,
GSE should be set free from the government connection aka, a separate public entity.
4d
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Joe D.
Volunteer I Veteran I Open to new opportunities in the US & EU
The article mentions, "(90% of all loans made today are backed by Fannie Mae, Freddie Mac or the Federal Housing Administration) " This could be a license for those writing the mortgages to casually think, oh it's not my problem if the loan goes bad, I got my cut, the government will take the hit if the loan goes bad. Did you think who really pays for it? One sure way is to have banks increase their mandatory cash reserves and not let them leverage what they don't have, with some creative derivatives offering. That or we repeat another housing free for all.
4d
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Frank B.
Galactic Council at www.frankbuijs.com
http://www.frankbuijs.com/letter-elizabeth-warren-ben-bernanke-relating-to-banking-criminals/
4d
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Bert W.
Student at RCC
I think real estate is still grossly overpriced, and people that have lost their homes over the last decade as a result of all this high-finance hijinx aren't about to let themselves get bent over, again. Too much speculation, too many people whose life situations were permanently disrupted. We're not all made of money, in this country, some people are lucky to have what they have, and are about one burglary away from being destitute. Hopefully, the high-minded, high-finance types will keep the working poor in mind, next time they plan something grandiose. Not to knock the bubbles off the champagne, but...there's a lot of poor folks in America, these days, and a tight little circle of rich people. Dow's riding high, but some parts of the country just aren't feeling the 'love'...
5d
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Mike Timlin 2^nd
CEO, TerraThermal
Some simple fixes: wind down Fannie and Freddie by preventing them from guaranteeing any more loans, but keep FHA for the entry-level market, say $120k and below. Interest rates are too low; they need to normalize to 5-7% for 10-30 year loans. Prices are too high, keeping willing buyers out: they need to fall back to median price of about 3x the median income, or $120k. Buyers can pay as much as they want, but without taxpayer subsidies above $120k. I'm not sure why mortgage loans need to be securitized; corporate bonds are not, and that market didn't skip a beat when Wall Street collapsed in 2008. I'd like to see the government guarantees undone, the assumable loan resurrected, and the loans secured by the values of the properties, not the borrowers.
5d
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Jonathan B.
Virtual Technical Analyst
fanniemaeleads.com has hot leads
5d
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hilord hioil&higas G.
management consultant at GreenChemistryNetwork
danmark is not useful cause of price of dinner: 20-100 euro. In poland FF free fragiles NEW !!! US militar force base in Redzikowo. Price of dinner: 0,51-13 euro.
5d
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