Secondary Markets Face Changing Environment

MBA (5/8/2008 ) Palaparty, Vijay
BOSTON—As debate continues in Congress over the future of the government-sponsored enterprises, panelists here at the Mortgage Bankers Association’s National Secondary Market Convention & Expo (minus the GSEs themselves) suggested that a changing market requires more, and not less, supervision.
“There has been a dramatic shift in the operations of Fannie Mae and Freddie Mac—their purchases surging by 68 percent this year,” said Edward DeMarco, deputy director and COO of the Office of Federal Housing Enterprise, which currently oversees the GSEs’ safety and soundness. “Their portfolios exceed $5 trillion and have become dominant in the mortgage system; and while they reduce risk in the market, it's taking a toll. Their [recent] losses have been $2 billion and $3 billion, respectively and they are challenged by deteriorating credit and decline in mortgage values.”

DeMarco said GSE reform would provide “prudential supervision” that considers both risk and mitigation. “It would ensure safety and soundness in addition to mission fulfillment,” he said. “Significant new products and services need to be evaluated on a balanced basis before they are launched and OFHEO needs flexibility for capital requirements.”

Ronald Rosenfeld, chairman of the Federal Housing Finance Board, said the Federal Home Loan Banks serve as an attractive alternative to Fannie Mae and Freddie Mac.

“We have made $925 billion worth of advances and will hit the $1 trillion mark in August, which is up $300 billion from the end of last year,” Rosenfeld said.

Rosenfeld added that GSE reform could make a stronger impact through a better investment stemming from sound decision. “In providing liquidity, is there a limit?” he said. “Not as long as investors buy the debt. I would assume and trust the home loan banks.”

Brian Montgomery, assistant secretary for housing and federal housing commissioner at HUD, said current proposals urging FHA to adopt risk-based pricing is “counterintuitive.”

“Borrowers at the highest FICO levels are those who are in the lowest income group,” Montgomery said. “These are working families who save money and are balancing FHA actuary soundness. As FICO scores get lower, incomes get higher. All we wanted to do is a price break on the premiums. There has been a lot of discussion about transparency and clarity in the industry.”

Montgomery also reiterated his opposition to downpayment assistance programs, insisting that such programs, while part of FHA’s portfolio, were “not sustainable” in the long run.

Rosenfeld said the concept that the higher the homeownership rate, the better, has been tempered by new market realities.

“The idea of homeownership has gone beyond its realm,” Rosenfeld said. “The concept has gotten hyped to the point that peopled wanted a home and could afford it because financial techniques. I encourage homeownership to the point that it is responsible.”

DeMarco agreed. “Homeownership has to be sustainable and there are lessons to take away from the current situation.”

Rosenfeld said while the regulatory system could be more streamlined, it will rarely achieve the forward-looking efficiency that anticipates issues.

“There are a lot of things that could make the system more efficient and inclusive,” Rosenfeld said. “But the one thing is that when you have a stress like we had in this past year, it’s very easy to blame the regulators. Not that they are not somewhat involved. But regulation is looking backwards. It’s very hard as a regulator, being on the front. If you think that reform of bank regulation or market regulation will prevent debacles, then every 10 to 15 years there will be some type of financial creation that will be ill-conceived and costly, but it will still be there. It takes a crisis to enact certain needed reforms. We are hopeful that this is the year we get this done. It’s good for furthering the missions of enterprises and home loan banks.”