Mortgage banking would return to conservative lending under a model that Joseph Tracy, executive vice president and special adviser to the president, Federal Reserve Bank of New York, advocates.
“You don’t need something that is chasing market share,” Tracy told attendees at the Securities Industry and Financial Markets Association’s annual meeting during a housing finance reform panel on Nov. 12.
“We like conservative and cooperative,” he says, noting that some oppose this industry constraint.
A housing finance system where the first loss piece is “mutualized” across members would help prevent the kind of systemic risks that occurred during the downturn from recurring, says Tracy. This leads to a situation where lenders are monitoring the underwriting of their peers. Lenders still would have to rep and warrant their respective loans. This makes some “demutualizing” possible, he says.
Market participants are concerned about how the equivalent of Fannie Mae and Freddie Mac’s “cash window” would work in this model and “that’s one of the details that has to be worked out,” says Tracy. A housing finance system should potentially have “multiple entry points for smaller lenders” who want to avoid selling to larger institutions as correspondents, he says.
A cooperative housing system also could sell off risky bonds to serve as “an external signal” to underwriters about how risk should be priced and evaluated, says Tracy.
The New York Fed’s model for a cooperative would pool securities six to 12 months and allow private capital to take a limited, first loss piece of this “vintage.” The potential loss would remain contained within the particular vintage in question only, he says.
The Corker-Warner bill’s model for housing reform, which also advocates a cooperative structure, could pass the Senate in 2014, says Henry Cisneros, Bipartisan Policy Center commissioner. The bill’s housing reform proposal parallels the BPC’s. Both propose a government guarantor with a backstop reserve fund, he notes.
When or whether the bipartisan Corker-Warner bill could clear the House is another question, says Cisneros, who also is a former Department of Housing and Urban Development secretary. It faces competition from Texas Republican Jeb Hensarling’s bill. California Democrat Maxine Waters also has a housing finance proposal in the works.
Housing finance reform will take many years regardless of what form it takes, he says.
The fate of Fannie Mae and Freddie Mac’s multifamily programs and affordable housing goals in reform might depend on whether the AH aim is “homeownership” or housing in general, including rentals, said panelist Barbara Novick, vice chair, BlackRock.
State authorities as well as federal programs support housing programs, notes Novick, who has long supported a holistic view of the issue for that reason.
The main thing the capital markets want from any plan is more certainty and known quantities, she says.
Novick backs a “vanilla” government housing finance system with high guarantee fees and lower loan limits.
“We really need that stable case,” she says, suggesting that other lending could be relegated to the private-label mortgage-backed securities marker.
Housing reform’s complexity makes a long timeline necessary, but “people are kind of disgusted that it is five years later and these entities are still in conservatorship,” says Novick.
Suggestions that Fannie Mae and Freddie Mac reform can stay are “really semantics,” she says.
Keeping Fannie Mae and Freddie Mac as New York Stock Exchange-traded government-sponsored enterprises is out of the question, but some of their functions could persist as a utility, says Novick.
The courts will determine the fate of investors in Fannie and Freddie’s stock, said Novick, when asked about whether reform could address this. Some privately call shares in the companies “lottery tickets,” she noted.
Some reform can occur without legislation said panelist Kevin Watters, CEO, mortgage banking at Chase. Fannie Mae and Freddie Mac can shrink their portfolios without a bill, he notes.
Edward DeMarco, the Federal Housing Finance Agency’s acting director, has made progress toward this end, Novick noted.
