The prospect of an administrative or legislative change to the current housing finance landscape — specifically, the possible release of Fannie Mae and Freddie Mac from conservatorship — looms large over the MBA’s National Secondary Market conference and expo in New York City this week after recent comments from FHFA director Mark Calabria.
The conference’s first session, Bringing Private Equity Back into the Market, didn’t address when the GSE release might take place (look for HousingWire’s coverage of Calabria’s session Monday afternoon). But it did ask important questions about how prepared the industry is for the return of private capital, offering the perspective of three key executives.
Eric Kaplan, director of the housing program at the Milken Institute, moderated the panel, which featured James Bennison, executive vice president of alternative markets at Arch Mortgage Insurance Company, Matthew Tomiak, managing director of structured finance at Redwood Trust, and Liam Sargent, head of capital markets at Chase Home Lending.
The three executives represent different parts of the secondary market ecosystem, but all agreed that private capital practices today are wholly different than they were pre-crisis, and consumers will be well-served by a greater private-capital presence in the market.
In fact, the panelists argued that the performance of loans bought by private capital investors since the crisis have performed so well that the standards are probably leaving out a number of worthy borrowers.
Some of the highlights from the wide-ranging discussion include:
When will private capital “come back”?
Tomiak (Redwood): “We’re not a giant market, but every day I sell some loans, I buy bonds… I think some of the hype just drones on and perpetuates the idea — ‘the market is never coming back.’ If a trillion dollars came back in to the market — that’s not healthy. It’s supposed to start slowly. We started by buying one loan, just like Fannie. Some people criticize and say ‘You can’t buy $800 billion in loans.’ We shouldn’t look for a morning where we wake up and it’s turned back on again — it’s evolving.”
What’s changed from pre-crisis
Sargent (Chase): “The product coming out now is so different than what we were doing pre-crisis, it’s not even fair to compare them. These are full doc prime underwriting mortgages, mostly stuff we would keep in portfolio before, but there’s a limit to what we can keep in portfolio. We had to decide if we wanted to offer this product for a couple years and then turn it off, or offer it forever and figure out different execution.”
Tomiak (Redwood): “Investors are incredibly skeptical now and that’s great, because I have confidence that when we sell something, they understand what they’re buying, and those assets won’t come back.”
Bennison (Arch): “From an MI perspective, the amount of diligence now absolutely dwarfs what was done pre-crisis.”
Tomiak: We have to get to sampling.. The biggest hurdle we have right now is we’re stuck in a100% diligence machine, which we had to do to start the machine again…
Kaplan (Milken Institute): “You can’t get to size to make a meaningful dent in home finance without sampling — 100% is so operationally intensive.”
Private capital or FHA?
Bennison: “What is the objective at the end of day? If it’s to de-risk the taxpayer-CRT is doing a pretty good job of that. But if you want to shrink the GSEs for private capital, it’s not clear to me which one is the primary goal. As you squeeze the GSE balloon, as you are shrinking the GSEs, above 80, where do they go? If they go to FHA, this has done exactly what you don’t want to do. It’s a terrible idea, but that is exactly what I think happens.”
QM and the patch
Sargent: “It was well-intentioned, QM, and the patch is fine too, but Appendix Q is written very poorly. Basically, all it does, it’s a prescriptive way to verify income… with the new technologies to verify income, it’s so prescriptive, we can’t be innovative outside of GSE delivery if we have prescriptive rules.”
Tomiak: The QM patch gives us the most problems. My concern is that if there’s a hole, private capital will find a way to jam as much through that hole as possible. If there is a way to exploit the system, private capital will find a way to do it. That potential for abuse starts to disappear if there’s a level playing field.
Bennison: When we think about the QM patch, it’s the unintended consequences… based on how rules were written on 40 DTI, above 43 would go to the FHA. I don’t think that’s the objective… we don’t want to find losing loans shifting risk to FHA.
Sargent: “We look at execution on every single loan — Ginnie, every single option we can get, to get the best price, the best loan for the consumer. If you keep best execution as the driver, it will force you to innovate. We have a big cost structure. If we are not making loans, our fixed loans are going to be a problem.”