The chief executives of Fannie Mae and Freddie Mac are moving forward with a bevy of changes that will continue to transform the mortgage market without input from Congress.
After eight years in conservatorship, housing finance reform in Congress remains in limbo, leaving the Federal Housing Finance Agency to force the government-sponsored enterprises to make changes.
"There is no playbook for how to run in conservatorship," Don Layton, Freddie Mac's CEO, told a group of lenders Monday at a Mortgage Bankers Association conference in San Diego. "We are now in our eighth year of conservatorship and every expert says the big bill to do a major reform of the housing finance system is several years away at least, so we are going to be in this status for a long time."
Both GSEs said they are looking to partner with individual lenders and with housing finance agencies to create new loan products that target specific communities.
Freddie is teaming up with Quicken Loans, the second-largest U.S. home lender, to co-develop loan products that would require a down payment of as little as 3%. Fannie also announced several changes that would allow more nontraditional and "thin file" borrowers to get a home loan. Next month, Fannie will introduce a self-service portal that can eliminate problems lenders have manually processing loans.
"We're improving our tools and data at the front end to expand access to credit to qualified borrowers, and we're laying off more risk to private capital and not taxpayers," said Tim Mayopoulos, Fannie Mae's president and CEO.
New projections show that 14 million households will be formed by 2024, an indication that the next decade will see strong demand for both rental and single-family housing, according to the MBA.
Mayopoulos specifically cited the current crisis in affordable rental housing.
"We're not interested in financing trophy projects on the coasts," Mayopoulos said. "The challenge will be that rent growth will exceed income or wage growth and this is producing a crisis in rental housing."
Fannie and Freddie have sought to reduce risk to taxpayers through risk-sharing bonds and the common securitization platform developed at the behest of the FHFA that could become the new foundation for housing finance.
"We are transferring the risk on 95% of loans that are in our sweet spot," Mayopoulos said. "If we went through another cycle, we think most of the losses would be borne by private capital and not taxpayers. And that will become a permanent part of housing finance going forward."The FHFA began work on the platform in 2012, an effort widely seen as a way for the bond market to maintain liquidity while Congress decided on proposals to dissolve Fannie and Freddie.
The agency will announce a date some time in 2016 for the launch of the single security, Layton said.
But both CEOs expressed concern about rushing the initiative and not wanting to have a debacle similar to the rollout in 2013 of healthcare.gov, the health insurance exchange web site that was marred by technological glitches.
"This is a very big undertaking, you have $5 trillion of assets between these two companies and none of us wants a healthcare.gov situation," Mayopoulos said. "We want to make sure the TBA market is not interrupted. This needs to be done carefully and thoughtfully with no delay that we can avoid. We need to be sure that we measure twice and cut once."
Many of the changes may seem incremental, but the CEOs described them as far-reaching.
"This is a new ecosystem in housing finance," Mayopoulos said. "We're fundamentally changing how mortgage origination happens in this country. It's a very different process from the way we've worked in the past."
Layton said Freddie "got rid of the early conservator mind-set" and has become a more customer-centric company.
"We are fully facing the future, not the past," he said.
Indeed, some of the changes have been years in the making.
For example, Freddie Mac for years was focused almost exclusively on the top 10 lenders, which accounted for 84% of its volume before the financial crisis. Today, Freddie has tripled its volume from lenders below the top 10 to 50%, from just 16% in 2008.
Both GSEs described their efforts to reduce risks to taxpayers. Fannie's investment portfolio has dropped to $200 billion as of Sept. 30, from a peak of $900 billion. And Fannie and Freddie's risk-sharing bonds have shed small slices of credit risk on loans they securitize, shifting risk away from the government and onto private investors.
"In the past we acquired credit risk and held it through the life of the assets," Mayopoulos said. "Today, we're moving a part of that credit risk away from taxpayers to private capital."