SAN FRANCISCO - In the midst of a changing housing market and headline risk, the GSEs have had to continually redefine, defend and reassess their roles under intense public scrutiny. At the Mortgage Bankers Association's National Secondary Market Conference & Expo 2005 held here last week, participants at the GSE Executive Update panel discussed their views on pending GSE legislation, the housing sector and the current advances and challenges in providing housing to underserved communities.
Although home price appreciation remains strong, panelists said that double-digit growth is not sustainable, specifically in the coastal regions. This is not as much of a problem in the interior regions, where homeowner incomes remain in line with valuations. Participants also warned against "red flags" - including a growing number of investment properties and alternative mortgage products - although these are not enough to cause a housing bubble to burst on a national scale. However, they remain concerned about certain markets.
Fannie Mae Senior Vice President Thomas Lund added that he does not expect a "dramatic dislocation" in the housing market, even with dwindling refinancings and slowing home sales, because it is still operating against a nominally low mortgage rate, which he expects to end the year at 6.25%. Federal Home Loan Bank of Pittsburgh Chief Operating Officer William Batz echoed this sentiment by saying that rising short-term rates should not have a constraining effect on growth as 30-year, 15-year and ARM mortgages still remain attractive.
Another hot topic at the panel was targeting new homeowners - specifically minorities - who may not understand that they have access to credit. Cultural differences such as distrust in the American banking system and a lack of knowledge of alternative mortgage products, as well as accommodative credit policies have hindered homeownership in these population segments, said panelists. They also noted the lack of funds for down payments and closing costs, highlighting the need for flexible or zero down payment programs. Panelists also said, however, that lenders currently have more time to cater to these borrowers, noting that one advantage to the end of the refi boom is that lenders are able to concentrate on the "harder to handle" mortgages requiring more counseling and hand-holding.
As a solution to these roadblocks, panelists emphasized the need
for education, product innovation, and technology. Ginnie Mae Executive Vice President Michael Frenz, for instance, said that technological advancements in underwriting engines could perform nontraditional credit assessments.
Panelists also warned against homeowners taking on more risk than they could handle. Fannie Mae's Lund said product innovation has its place but added that he is nervous about sustainability. "Are we setting them up for failure?" he asked. While providing access to homeownership is important, panelists said that it is also crucial that borrowers receive a mortgage that they could actually afford and stay in their homes.
Risk layering also becomes an issue as more first-time homebuyers move into credit-sensitive mortgage products such as loans with prepayment lockouts and loans where the principal and interest payment resets occur at the same time. The FHLB's Batz said that they are careful about loans appearing to be predatory. But, he said that some loans only appear predatory, as they are applied to the wrong borrower.
Offering mortgages more suitable to borrower needs and financial capacity would prevent the "stripping of equity," according to Freddie Mac Senior Vice President Don Bisenius, who added that some borrowers are focused on gaining wealth through home price growth. As rates rise, however, amortization will be the key to building up equity, he added. Freddie Mac "wrestles a lot with the issue of subprime lending," said Bisenius. As long as there is an eye toward product suitability, this type of lending could be helpful to both homeowners and the mortgage industry, Bisenius said, adding that he has found that subprime loans could exhibit similar performance to prime loans on a relative, but not absolute, basis. Bisenius also said that Freddie is looking to be a more active participant in the non-triple-A subprime arena.
Panelists were also asked what they expect in the next year. FHLB's Batz said that he hopes the FHLBs would be granted the authority to securitize while Freddie Mac's Bisenius has an eye toward success in product innovation. Fannie Mae's Lund hopes that by this time next year the "house would be in order and controls would be in place." Ginnie Mae's Frenz is looking for a turnaround in Ginnie Mae's market share, even if it's not by a significant amount.
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