Here we go again.
Fannie Mae and Freddie Mac, while still in conservatorship and with the blessing of the Federal Housing Finance Agency, are once again expanding into new products and programs with abandon — and in the process potentially adversely affecting industries, businesses and careers.
The government-sponsored enterprises’ past and present actions are reminiscent of the 1958 cult classic "The Blob," debuting a young Steve McQueen. An ad for the film features the Blob growing as it consumes everything in its path. It's “indescribable.” It's “indestructible,” the copy says. “Can nothing stop it?”
If this doesn’t conjure up an image of the GSEs, nothing will.
Their expansionary tendencies date back to the 1990s. Back then, members of the housing industry organized to push back on the GSEs’ insatiable appetite for all things mortgage. The goal was to recognize the bright line between the primary and secondary mortgage markets.
Their message to the GSEs was: Stay out of the primary market, it belongs to the private sector.
Yet today the Blob is back, with the same insatiable appetite to consume all in its path. Consider several recent examples, including integrated mortgage insurance, known as IMAGIN, lines of credit to nonbank services and the easing of combined loan-to-value and debt-to-income limits, among others.
Particularly troublesome for aspiring homebuyers is the GSEs’ statutory “affordable housing” mandate, which the FHFA has interpreted to require the undertaking of the procyclical easing of credit terms during unsustainable home price booms. This includes extreme easing of combined loan-to-value and debt-to-income limits. History has shown this makes entry-level housing less, not more affordable. And by moving out the risk curve in a boom market, banks and credit unions become less willing to originate for sale to the GSEs, largely leaving the market to nonbanks, furthering the boom.
Among new program initiatives, IMAGIN, a risk-sharing deal between Freddie Mac and Arch Capital, deserves particular focus. Twenty years ago, the GSEs tried to marginalize private mortgage insurers — and they are now at it again. The product is billed as an “innovation” in lender-paid mortgage insurance, a slice of the business that accounted for about 20% of all mortgage insurance written in 2017. IMAGIN is being touted as a new, less expensive form of risk-sharing and credit enhancement than traditional lender-paid insurance. History should have taught mortgage insurers two things: Beware of GSEs bearing gifts. IMAGIN once again crosses the line between the private sector and the GSEs’ secondary market activities.
There are also troubling questions about the product’s transparency, specifically Freddie’s pricing, coverage requirements and underwriting standards for IMAGIN. Although the initiative sounds like a “disrupter” and cost saver for the borrower in the short term, the deeper, longer-term outcome may be less private capital in the market, greater risk to taxpayers and harm to the mortgage insurance industry. If so, it’s the consumption of another industry, business or career by the Blob.
Potentially even more serious, these expansions may impede more permanent private capital from entering the mortgage market, replaced by hotter capital, that could, as history shows, evaporate when interest rates rise or recession looms. The GSEs have long thought mortgage insurers were expendable and could be replaced — by themselves, of course — were it not for a charter provision mandating some form of insurance on loans exceeding 80% loan-to-value.
The Mortgage Bankers Association recently recommended that the FHFA increase transparency in its approval process for new products and activities undertaken by the GSEs. It suggested that the FHFA should ask itself if the new products and programs are “in the public interest.”
We agree, it’s time to stop feeding the Blob and to recall the second of the FHFA’s three strategic goals from 2012: “Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations.”