Stevens Warns of Potential Hiccups in GSE Reform Push
September 23, 2019
The new push by the Trump Administration to bring the government-sponsored enterprises (GSEs) out of their 11-year federal conservatorship could result in some negative impacts on the wider mortgage market, according to an opinion piece by David H. Stevens, the former president and CEO of the Mortgage Bankers Association and commissioner of the Federal Housing Administration (FHA).
In a blog published on his Web site, Stevens praised Fannie Mae and Freddie Mac as “one of the most stable sources of capital to support the housing system this last decade despite a Great Recession and today’s current risks in the bond and repo markets, and perhaps an impending economic slowdown ahead.” Yet he noted the GSE reforms proposed by Federal Housing Finance Agency Director Mark Calabria could have a major effect on the current playing field.
“While Director Calabria trumpets the potential modification to the sweep, in order to retain capital in exchange for having the U.S. government receive greater shareholdings in the companies, as reported by the Wall Street Journal, there are potential disruptions to small lenders, low downpayment borrowers, multifamily rental property, and mortgage-backed security (MBS) investors,” Stevens observed. “All of this could result in a shift of power from nonbank lenders and smaller depositories to on-balance sheet buyers of mortgages. The beneficiaries could include large banks, some REIT’s, and the new entrants like Angel Oak and others who can leverage the private market to disintermediate the GSEs themselves.
“For small lenders,” he continued, “regardless of capitalization and a pathway to release, the real question is whether the GSE and perhaps FHA footprints will narrow. Should the regulator determine that the GSE’s are ‘crowding out private capital,’ something Director Calabria seems to have already concluded, then we may see moves that will shrink the role the GSEs play. This could include a variety of options one of which would be to simply price out the GSEs against private industry execution, or modifying loan purpose or other terms, potentially forcing smaller lenders and nonbanks to move back into correspondent lending to larger players or simply reducing their volume altogether relative the scope of products and terms we see today.”
Stevens forecasted that the “pathway ahead is clearly bullish for the nonagency market and positive for an increase in private capital to the system. Balance sheet investors that view the GSE’s as competition will likely be winners.” Yet he also argued about moving too fast with the new reform proposals without cooperation between the Executive and Legislative Branches of government.
“The devil we know today, two GSEs in conservatorship, at least works and is critical to the complicated and interwoven relationships that begin with a homebuyer and ends in a global universe of investors,” he added. “Administrative reform, absent legislation, is not the formula that many stakeholders called for because of things like the points stated here. We all have an obligation to be vigilant in our advocacy for attention to detail and avoiding unnecessary adverse outcomes. The question today is whether the devil we know is better than devil we don’t. That remains to be seen.”
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