Greater clarity around repurchases and a new set of affordable lending products went a long way toward improving bankers’ relationship with the government-sponsored enterprises (GSEs) this year, though memories of crisis-era buybacks linger like a bad champagne hangover. In the New Year, forget all those resolutions to wind down Fannie and Freddie; they’re here to stay – at least for now.
For all the talk of privatizing Fannie Mae and Freddie Mac, the two GSEs still play an enormous role in the mortgage business. In the third quarter alone, they collectively pumped well over $200 billion in liquidity into the mortgage market.
And bankers said that new programs aimed at first-time homebuyers and greater clarity around repurchases have helped to patch what was once a troubled relationship.
“There are still some challenges with regard to the relationships between banks and the government-sponsored enterprises,” said Simon Tahan, senior vice president and director of mortgage banking at Webster Bank. “There’s still a lot of paranoia about buybacks, but things are getting better, I’m pleased to say.”
Moreover, he said, the GSEs have opened the credit box, easing standards for borrowers with less-than-perfect credit, allowing up to a 97 percent loan-to-value ratio for some affordable lending products, and limiting loan-level price adjustments for creditworthy borrowers.
“The good news is, the GSEs have moved with regard to the credit pendulum,” Tahan said. “There’s a little bit more ease of credit, and Fannie and Freddie have come slightly out of the box with regard to credit and treatment of certain types of obligations and assets.”
That expanded menu has been particularly beneficial for community banks, many of which might not otherwise have access to the capital markets without the government-sponsored enterprises.
“Obviously, we have our CRA goals to meet, [and] we do take the responsibility of offering first-time homebuyers in our marketplace a safe, viable and sustainable mortgage product [very seriously]. We think those products meet that criteria,” said David Brennan, senior vice president and chief residential and consumer lending officer at Cape Cod Five Cents Savings Bank.
Though the figure varies year to year, Brennan estimated that this year, Cape Cod Five would likely sell about $450 million of the total $750 million worth of mortgages it expects to originate.
“I think that we’ve seen a lot of very, very positive changes in Fannie and Freddie compared to the issues that got us into a whole lot of trouble. Clearly they’ve put a lot more quality control in place. The way they’re reviewing is much more intentional than it was before,” he said.
Leveling The Playing Field
Meanwhile, Fannie and Freddie will continue rolling out a new common securitization platform mostly intended to level the playing field a little bit on the trading floor.
“If you think about what’s been going on between the two GSEs, they’re largely the same, but their securities trade much differently in the market,” said Scott Haymore, TD Bank’s head of pricing and secondary markets.
Referring to Fannie’s 54-day delay versus Freddie’s 44, he said, “Theoretically, Freddie should trade higher than Fannie, but it never has.”
Brennan commented, “I think the intent of that common securitization platform was not to give an advantage to the largest lenders in the country but to equalize the availability of the capital markets to all lenders.”
But he was more concerned about an extension for Fannie and Freddie’s so-called “QM patch” – by which the GSEs can set their own standards for either seven years or whenever they exit conservatorship.
“It’s very important to the market that we can sell loans to Fannie and Freddie as QM based on their underwriting guidelines, especially so we can serve the underserved markets which are very, very important to us as a community bank,” he said.
Concerns linger about interest rates; though the Fed bumped its key interest rate just 25 basis points, Haymore expected that would be enough to dampen origination volume and shake out whatever few refinance business might actually still be left.
“Most economists have been calling for rates to go up and for all of us in the mortgage industry, that means we’ll all be competing for much lower origination volume,” he said. “That’s the worry.”
Bankers are certainly a cautious bunch and not likely to forget the sins of the crisis anytime soon, but Tahan said he’s hopeful for the year ahead.
“It’s great to see what Fannie and Freddie have done in 2015, really moving the pendulum and providing a little bit of ease of credit. I’m encouraged that we’ll see more good work done by them,” he said. “I think there’s a lot of work that still needs to be done but there’s clearly a lot of good dialogue moving in that direction.”
Email: lalix@thewarrengroup.com.
