The Obama Administration’s white paper on the future of the GSEs may have muddied the issue as much as it clarified it.
Because while it put forth five different options for the future of Fannie Mae and Freddie Mac (and immediately dispensed with two of them), there will still be debate over which of the three options the government should eventually adopt. And that is the key word, eventually, because any definitive action is not likely until 2012 (and some say even after the next presidential elections will a decision be made).
That being said, there is some talk about how a new secondary market, one driven by private investors, will shape up.
At the Regional Conference of the Mortgage Bankers Associations in Atlantic City, ASR sister publication National Mortgage News (NMN) sat down with a panel of industry representatives to discuss not only the secondary market, but also other issues affecting the future of the mortgage industry such as the loan officer compensation rule, which went into effect on April 5.
Meeting with NMN editor Mark Fogarty and associate editor Brad Finkelstein are E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, the Mortgage Bankers Association of Pennsylvania and the New Jersey Association of Mortgage Brokers (NJAMB); Joseph F. Heisler Jr., NJAMB president and president of Fidelity Mortgage Co., Toms River, N.J.; and Boyd A. Orr, MBA of Pennsylvania past chairman and administrative vice president/Pennsylvania retail sales manager for M&T Bank, Lancaster, Pa.
FINKELSTEIN: There is uncertainty regarding the future of the secondary market. There has been talk that in the new secondary market world, we could see products such as the 30-year fixed-rate mortgage go away. Is that a possibility, a probability or it won’t happen at all?
ORR: If you are going to get Fannie and Freddie out of the picture, and you want people to come back, this is a global environment. You want people to buy those mortgage-backed securities, are they going to take the risk on 30-year fixed or are they going to want to do what Europe does, with the covered bonds with shorter terms. If I were an investor I’d have to have second thoughts, especially with what’s happened with the housing industry in this country. Who’s going to want to invest in 30-year money if it is not transparent and you can’t move it around quickly?
FOGARTY: If it is only yielding 4% or 5%, it is not a good bet for 30 years, is it?
HEISLER: And I think, along those lines if it doesn’t go away completely, what you will see is a drastically higher cost for that type of loan, which again adversely affects the consumer.
FINKELSTEIN: I was recently speaking with someone with international experience. And more so on the business side and not the investor side, many people overseas admire the fact we have the 30-year fixed-rate loan.
ORR: The consumer admires it; everybody else says, “I can’t believe you still do it.”
FOGARTY: Consumers like them.
ORR: That’s why they can’t get them in most parts of the world.
HEISLER: And you look at the GSEs, and there are proposals that are out there and no one knows what is ultimately going to happen, but there are those who want to see no government guaranty whatsoever and the GSEs to go away completely. I’m not quite sure why a process that worked for the better part of the 70 years it has been in existence, because there were some mistakes made within those organizations in the last five years, they are now to be done away with, throwing out the baby with the bath water. The GSEs have been around for roughly 70 years and for the majority of that time have functioned very well and served their purpose in keeping the flow of capital. There were mistakes that were made in the last five to 10 years and now suddenly they have to be done away with and dismantled completely.
FOGARTY: My question is, who’s going to make the markets when they are gone? There will be people to do it in the good times, but who is going to have a mandate to do it in the bad times? The Wall Street conduits? I don’t think so. The megabanks? I don’t think so? Who is going to do it?
HEISLER: And that was part of the discussion with the panel this morning [on the secondary markets] as far as what the options are and what type of structure we are going to see going forward. Because that is probably exactly true in the sense that if there isn’t something to keep that consistency, then they won’t, that private capital will come in when things are going well for them and leave when they are not.
FOGARTY: On the nonconforming side, Wall Street has done it twice in the past 12 years or so. They did in 1998 and they did it in 2007.
LEVY: My meetings that I’ve had in Congress tell me at least on the Republican side, they have absolutely no interest in any kind of federal guaranty, either explicit or implicit. That is a very strong position right now. There are some in the industry that feel without that (guaranty), it is going to seriously disrupt the ability to do business in the mortgage finance area.
FOGARTY: That would certainly be a huge change. These are companies that control hundreds of billions of dollars of product and of course, they are not going to go away right away. People are estimating five to seven years. We haven’t seen the last of them yet. But who steps in for that big of a market?
HEISLER: And that was part of the discussion with the panel this morning [on the secondary markets] as far as what the options are and what type of structure we are going to see going forward. Because that is probably exactly true in the sense that if there isn't something to keep that consistency, then they won't, that private capital will come in when things are going well for them and leave when they are not.
FOGARTY: On the non-conforming side, Wall Street has done it twice in the past 12 years or so. They did in 1998 and they did it in 2007.
LEVY: My meetings that I've had in Congress tell me at least on the Republican side, they have absolutely no interest in any kind of federal guaranty, either explicit or implicit. That is a very strong position right now. There are some in the industry that feel without that (guaranty), it is going to seriously disrupt the ability to do business in the mortgage finance area.
FOGARTY: That would certainly be a huge change. These are companies that control hundreds of billions of dollars of product and of course, they are not going to go away right away. People are estimating five to seven years. We haven't seen the last of them yet. But who steps in for that big of a market? I don't know who it is.
HEISLER: Every conversation I have been a part of, it is always private capital has to come back in. But as you said, we've seen them disappear twice in the last 10 years.
FOGARTY: They come in when they can make money and leave when they can't.
ORR: Or you force the banks to put loans back on their balance sheet like in they used to in the old days, then we had the S&L crisis when the rates changed. You are looking at that scenario again.
