Three industry executives attending the Mortgage Bankers Association’s National Secondary Market Conference in New York this year weighed in recently on the government and private secondary mortgage markets. And in the excerpt that follows, they discuss how the transition away from the former toward the latter might someday take place.
Participants in the discussion were David Kittle, senior director of industry relations at IMARC, Lenders One chief executive officer Jeff McGuiness, and Alex Santos, president and managing director of Digital Risk.
The three are notable in that Kittle is a longtime industry veteran as well as a former lender and Mortgage Bankers Association official, McGuiness just recently assumed the responsibility for leading a lender cooperative that aims to pool the resources and provide economies of scale to a group of relatively smaller market participants, and Santos has recently launched an effort to establish an industry best practices group.
In this excerpt of their remarks, they answered questions posed by mortgage publications group editorial director Mark Fogarty, senior housing correspondent Lew Sichelman, managing editor Bradley Finkelstein and editor Bonnie Sinnock. Other portions of the discussion may appear in other affiliated print or online publications in the SourceMedia mortgage group.
FOGARTY: We mentioned the jumbo securitizations done by Redwood and I think they’re ramping them up...Any other green shoots that you see? Distressed asset securitizations? There’s obviously a lot of product there. Whole loan trading? Is there any indication of a market forming?
SANTOS: Not a lot that we’re seeing. I don’t want to say definitely no but there is not a lot...
MCGUINESS: I think everything we have seen has very circumspect, very risk averse and it’s very safe and it’s not indicative of a liquid product. And we’re seeing it be put out by a few market players...I don’t think it’s indicative of anything close to a healthy market.
SICHELMAN: Does the Fannie Mae/Freddie Mac problem have to go away?...Isn’t that a precursor?
KITTLE: It was mentioned by (MBA president/CEO) Dave Stevens...I like what he put forth...if there is a way, if DeMarco wants to combine the two into one...then you can merge the two entities together, I think that’s a great way to do it...If you wanted to have the perfect model, that’s sitting right there in front of us. That is Ginnie Mae...It works, it’s profitable.
FOGARTY: Ginnie Mae has never shown any appetite to become a super-agency...
KITTLE: I meant, Fannie and Freddie modeling themselves after Ginnie Mae.
FOGARTY: I see...
SICHELMAN: They could go back to being basically government agencies for a specific purpose...
MCGUINESS: I think that’s what you’re suggesting if you’re suggesting an emulation of the Ginnie Mae model...
KITTLE: The model itself and how they work within the government, they could take that model and it doesn’t have to be totally government-sponsored. But you go back to the RTC days...back in the ’80s. It wasn’t there forever. You can’t always just count on private capital...We’re going to have to have some type of government guarantee, whatever it is, at some point. So, to be clear on that, thanks for bringing it up, I’m not seeing it being 100% government backed. You can take the model or the way that (Ginnie Mae president) Ted Tozer or people before him at Ginnie Mae have operated, they really had to sweat...
MCGUINESS: I think Brad brought up a really important point about serving two masters. If you think about how we got here, we’re looking at entities that, yes, they are government sponsored but they also have...shareholders like any publicly traded company would have, focused on performance. The performance numbers were coming off some very aggressive loans, and like the rest of the market, they were being compared to the rest of the industry for their performance: share performance, not future loan performance.
SINNOCK: How do you think the government involvement should be scaled back? There’s been some discussion at the conference about whether it should be done using this process of raising the loan limits. What are your thoughts on that?
SANTOS: On what is the best way to reduce regulation?
SINNOCK: On what is the best way to reduce the GSEs’ involvement.
SANTOS: ...I like the process where they are slowly unsubsidizing the conforming loan market by raising g-fees...The problem with doing that too quickly, however, is you may present a shock to the system on affordability...
FOGARTY: Wouldn’t cutting the loan limits cause a drop in the share the agencies own...?
SANTOS: I’m not sure in the short term that should be the priority. We’re concerned about liquidity, so I’m not sure in the short term it’s a good idea to start ripping the GSEs out until we’re sure there’s evidence that private capital can step in.
FOGARTY: The FHA’s definitely cutting back share...about a 50% drop from last year to this year which is certainly significant.
MCGUINESS: I would say, Mark, that there is another component to consider in terms of weaning off the absolute amount of value we see going through the agencies right now and that’s back to that private sector. That private sector...comes of the sideline...when that happens, it won’t just be around the jumbo product. It will be around all the other types of products that we’ve seen go away. I don’t believe they will be, in any way, shape or form what they have been in the past. But they will come off the agency standard (in terms of) FICO, LTV or other deviations, and that will cut into the share that we see going to the agencies today.
FINKELSTEIN: We have seen some private capital coming back (in terms of the private mortgage insurance industry) is that just a baby step...?
MCGUINESS: One of the things that we have to consider is the operations of our fellow mortgage bankers. When they see new product, they have to think about how they are going to retrofit that product into their current operations, and most well-performing operations these days are entirely predicated around the agency execution, and they’re hyper-vigilant on the process because they are scared of all the rep and warrant put-backs. So they take on a new product much, much less aggressively than they used to. So if you take a new product, think it makes all the sense in the world and it serves the marketplace, you’re going to see a slow adaptation of that product into the market itself.
FOGARTY: The FHA traditionally has been prone to lower FICO scores and first-time homebuyers, etc. If they cut their production by 50% won’t that create a demand for private money, because they have been traditionally very similar to the nonconforming. FHA has ratcheted up its FICOs in recent years, for sure.
KITTLE: A couple of responses to that. I bought my first house using the FHA program in 1976...It needs to still be there. When I first got into this it was about 35% of the market. For most of my mortgage-banking career it’s been 35 to 38% of the market, until the 2000s when it came all the way down to about 2%. I am concerned at this point, personally speaking, for me, about FHA because they have a liquidity problem...that they are raising the (mortgage insurance premium). FHA is there to serve minorities, people with less-than-perfect credit and first-time homebuyers. So the people that are going to buy going forward, that fund is being balanced on the backs of those people going forward...I don’t have another solution, I’m not here to give one as to how they shore up the funds, but I don’t think it should be on the backs of those people going forward.
SICHELMAN: You mentioned reps and warrants and buybacks going back five, six, seven, eight, nine years, finding something wrong and what mechanism do you think needs to be put in place that will satisfy both lender and investors?
SANTOS: In my view, there have been attempts by numerous players in the market to consider, and/or implement alternatives to the traditional rep and warrant model.
