Finding the small lender sweet spot after GSE conservatorship

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For over a decade, Fannie Mae and Freddie Mac sat in conservatorship following the housing market collapse. Pulling both entities out remains a complex, multifaceted topic highlighted, circled and underlined at the top of the Federal Housing Finance Agency's priority list.

The existing Housing and Economic Recovery Act states the government-sponsored enterprises must be rehabilitated, then released out of conservatorship once they are.

Improving Fannie and Freddie's capital position takes precedence in preparing them for exiting conservatorship. Federal Housing Finance Agency Director Mark Calabria said he's hopeful and expectant for them to get out by the end of his term in 2024.

While assessing the GSEs' credit risk and calculating how much capital they must hold is set to be revamped this year, how the companies will operate in a post-conservatorship world remains to be seen.

For smaller lenders, Fannie and Freddie conducting themselves like public utility companies would be the best-case scenario, according to Robert Zimmer, principal at TVDC — a Washington-based financial services and public affairs consulting firm representing small lenders in the single-family and multifamily sectors through two trade organizations, the Community Mortgage Lenders of America and the Multifamily Lenders Council. Another group representing small mortgage companies, the Community Home Lenders Association, also backs the utility model.

"My lenders ideally would want them to come out of conservatorship and finish their transition into public utilities, not unlike electric or water companies," Zimmer said in an interview. "In this case they'd have a public congressional charter and they would have shareholders. There's advantages to having a secondary market vehicle that's not wholly in the government. They can be a little more nimble and can react quicker to the market."

Zimmer's clients essentially want to level the playing field on pricing between themselves and the larger lenders. They'd also prefer the GSEs to be adequately capitalized to be able to survive the next downturn, but not overly capitalized to the point where it hurts economic growth and keeps creditworthy families from being able to participate. Going toward a public utility and away from a growth model strikes a mutually inclusive balance.

"With growth stocks, you promise someone annual increases in the share price. Utility stocks promise you a steady dividend," Zimmer said. "The problem a large finance company has — it doesn't matter if it's Wells Fargo or Fannie Mae — is what do you do when the market softens, but you promise investors 14% share price growth every year? The beauty of a dividend stock is it reinforces the notion when the market softens, you protect the book. The Wells Fargo issue of creating fake accounts is all about chasing the growth stock model. Once you get to a certain size in finance, you can't grow forever and ever. Trees don't grow to the moon. If Fannie and Freddie had that incentive back in 2008, they would have been better off."

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GSE reform Housing finance reform Housing market GSEs Fannie Mae Freddie Mac FHFA Mark Calabria