The move lays rest to concerns the program could create unfair competition for MSR financiers in the private market and expose Freddie to counterparty risks that lie outside the bounds of its charter.
But the pilot’s end also could disappoint nonbanks that would have benefited from it.
“It’s just not what the GSEs were chartered to do. I think there’s a legitimate concern raised by that, but on the other side, you have these nonbank originators who need this kind of financing and are comforted by the fact that Freddie Mac would participate,” said Steve Harris, managing director at MIAC Capital Markets.
While current market conditions are very different from the ones that existed at the time the pilot was conceived, demand for MSR financing still exists today for new reasons, Harris noted.
Nonbank mortgage firms previously sought and amassed MSR financing in an era when relatively higher rates constrained their origination profits and increased the valuations of their servicing, making the latter attractive to borrow against.
With the more recent drop in rates, loan production units’ profitability is higher, but the valuations of MSRs securing their pre-existing financing are lower, creating a need for financiers to adjust for the difference. That could increase demand.
However, the supply currently available should be enough to meet the market’s needs without the GSEs’ involvement, according to FHFA Director Mark Calabria.
“The MSR market is already served by a wide assortment of highly competitive private sources of capital and financing,” he said in a statement issued Wednesday. “Going forward, the enterprises should focus on activities that are core to the guaranty business, mitigate risk, and are essential to end the conservatorships.”
The ability to obtain sufficient funding in the private market should be a prerequisite for holders of the GSEs’ MSRs, according to Rebeca Romero Rainey, president of the Independent Community Bankers of America.
“If those mortgage servicers cannot obtain financing from readily available commercial banking sources or the capital markets, then they should not be allowed to hold GSE MSRs,” she said in a statement released Thursday, which reiterates a past position the group has taken.
The stated aim of Freddie’s pilot — which was launched before Calabria became director of the FHFA — was to manage the risk that a lack of funding could impair servicers’ ability advance payments to investors on distressed loans. Servicers advance these payments until the GSEs buy delinquent loans out of securities. Fannie Mae and Freddie Mac buy out delinquent loans after 120 days.