DALLAS—While politicians continue to figure out what to do with Fannie Mae and Freddie Mac, the federal conservator of the mortgage companies is hard at work implementing new policies and practices to improve the government-sponsored enterprises for as long as they are still around, according to Patrick Lawler, chief economist and associate director of the Federal Housing Finance Agency.
Speaking at the SourceMedia Best Practices in Loss Mitigation Conference here last week, Lawler said the GSEs’ book of business post-conservatorship is profitable and well underwritten. But with the GSEs originating about 65% of all new mortgages, there are still steps Fannie and Freddie need to take to ensure operations remain strong even though they may not remain the dominant force in the industry.
The GSEs are reducing their retained portfolio and have instituted a policy of not creating any new programs outside of initiatives to promote loss mitigation and helping homeowners avoid foreclosure.
Also, an alignment initiative is creating consistency in the policies and procedures at Fannie Mae and Freddie Mac, and brings together the best policies at each institution and making them both better companies, Lawler said.
Lawler said the FHFA is also working with other state and federal regulators to help manage changes to practices like mortgage servicing. The “massive change in servicing behavior that we’re trying to create” may include changes to the servicing fee structure. Lawler said servicers should get more money for the work they do to handle nonperforming loans, but added that it should come with a decline in the fee servicers get for managing performing pools.
Another piece of the alignment initiative is the Uniform Mortgage Data Program, which the FHFA mandated Fannie and Freddie undertake to begin collecting full electronic appraisal reports and new electronic loan files. “The past system relied too heavily on reps and warrants,” Lawler said, and with the UMDP, Fannie and Freddie will have more loan-level data they can review for loan quality. “With the UMDP, we’re trying to create network standards to make the system more efficient and more standard,” Lawler said.
When asked if the new collateral data the GSEs are collecting could lead to Fannie and Freddie structuring mortgage-backed securities based on both credit and collateral criteria, Lawler said it was an interesting concept, but currently unnecessary because all GSE loans have government backing. He added that it may be a private market initiative, but “whether further tiering would be advantageous, I’m not sure,” he said.
The way Fannie and Freddie price loans could also change, both as a way to reduce the GSEs’ share of the origination market, and to ensure Fannie and Freddie are covering all their costs, including losses and cost of capital.
Changes to the guarantee fees that Fannie and Freddie charge could keep private competition out if they’re too low, or could dry up liquidity if they’re raised too quickly. And with tighter underwriting standards, more business could shift to the Federal Housing Administration’s book of business—and merely shift the government’s backing of the loans from the GSEs to Ginnie Mae.
Lawler also said the “cross-subsidies” in the GSEs’ originations mean the mortgages with the highest loan-to-values and lowest FICO scores are priced higher, but also subsidize better quality loans, when all loans should be priced sufficient to cover their costs.
Similarly, differences in state laws and foreclosure timelines mean it’s more expensive to foreclose in states with longer timelines. Lawler said an ideal foreclosure timeline should be about six months, but in some states it’s taking 450 days, and that’s after already waiting six months to try to do a modification or other workout plan.
Time is money and “if it costs that much more, somebody has to pay for it,” Lawler said. “Right now that means Fannie and Freddie but it ends on the backbones of borrowers in other states.”
While saying it’s important to be sympathetic to distressed borrowers’ financial situation, there is a cost associated with extending timelines. “We should consider if fees should be different for loans made in other states,” Lawler said.
