© 2024 Arizent. All rights reserved.

Improvising Lending Policies

The passage of the payroll tax holiday extension in December was, in my mind, a watershed moment for the mortgage and MBS markets. For the first time, Congress instituted a tax on mortgage transactions, to be collected by Fannie Mae and Freddie Mac. In this light, the operative question for regulators and policy makers is simple: "What are we trying to accomplish?"

In addition to the continued discussions involving non-agency risk retention, a number of proposals and ideas that would threaten the stability of the agency TBA market are under consideration. Most prominent of these is the proposal to change servicing compensation to a strict "fee-for-service" scheme. While the proposal does have some merit, it would be highly disruptive to both mortgage lending and TBA trading, the one sector of the MBS market that has functioned reasonably well throughout the last four years. Along with forcing lenders to substantially change their best-execution calculations, the fundamentals of loan "pooling" would be altered. It is unclear how a fixed-dollar cost of servicing would be included in the creation of a pool, and it would also make comparisons across different cohorts and vintages extremely difficult.

Dictating servicing fees also risks further pressuring the market for servicing. The number of institutions willing to acquire and hold servicing has already shrunk substantially in 2011 due to the withdrawal of a number of major players, along with concerns about the impact of Basel III on capital adequacy. These have led to a drop in servicing values and a commensurate decline in prices that correspondent lenders are paying for loans. While the idea of reducing the amount of required servicing held has been discussed for years, a radical change in servicer compensation practices risks disrupting the agency MBS market, on which virtually all mortgage lending is currently dependent, for little clear benefit.

However, the worst and most counterproductive idea from 2011 was using GSE guarantee fees to fund an extension of the payroll tax holiday. This provision, included in the recently enacted legislation, will increase the cost of conventional mortgage finance at a time when housing remains deeply troubled. Using increases in g-fees instituted over two years to fund a two-month extension of the payroll tax holiday is shortsighted and foolish. It also sets an important precedent, as it effectively is the first national tax on mortgages. The g-fee surcharge also runs directly counter to the numerous initiatives designed to either push mortgage rates lower or improve borrowers' ability to refinance. (The Fed's various quantitative easing programs are an example of the former; the recently announced HARP 2 program exemplifies the latter goal.)

Moreover, using the agency mortgage market to fund unrelated programs is completely inconsistent with the goals outlined in the Obama Administration's white paper on the future of the GSEs. The 10-basis-point average increase in g-fees is far too small to be rationalized as an effort to "level the playing field" that will make non-agency lending more competitive with GSE execution. Rather than phasing out Fannie Mae and Freddie Mac, making the GSEs a convenient source of funding for politically-favored initiatives will serve to further entrench them in housing finance.

At this point, policies for housing and mortgage lending have sunk into a confused morass with no discernible goals or unifying principles. It is therefore not a surprise that the combined efforts by the FHFA, the Treasury Department and the Fed have been unable to stem the debilitating drop in home prices. Rather than a smattering of ineffective programs and initiatives, the country needs a set of coordinated policies that will support home prices and mortgage lending.

 

Bill Berliner is Executive Vice President of Manhattan Capital Markets. He is the co-author, with Frank Fabozzi and Anand Bhattacharya, of the recently-released second edition of Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques. His email address is bill_berliner@manhattancapitalmarkets.com.

For reprint and licensing requests for this article, click here.
RMBS
MORE FROM ASSET SECURITIZATION REPORT