Freddie Mac's former CEO Don Layton predicts that higher GSE lending costs lie ahead, should the Trump administration’s plans for the agencies move forward.
That's in part because guarantee fees eventually became the main source of revenue for government-sponsored enterprises after they entered conservatorship in 2008 and underwent reforms aimed at reducing taxpayer risk.
And now reproposed capital requirements for Freddie Mac and Fannie Mae suggest the GSEs will need more revenue if they exit conservatorship.
Donald "Don" Layton, chief executive officer of Freddie Mac, speaks at the annual Milken Institute Global Conference in Beverly Hills, California, U.S., on Monday, April 28, 2014. The conference brings together hundreds of chief executive officers, senior government officials and leading figures in the global capital markets for discussions on social, political and economic challenges. Photographer: Patrick T. Fallon/Bloomberg *** Local Caption *** Don Layton
Patrick T. Fallon/Bloomberg
"This will have a major impact on the cost of mortgage credit," said Layton, who is currently a senior industry fellow at the Harvard Joint Center for Housing Studies. "Guarantee fees, or revenue of the GSEs, will need to go up to be able to have a proper return on the shareholders' equity."
Mortgage industry groups recently asked Fannie and Freddie's conservator and regulator, the Federal Housing Finance Agency, to extend the time they have to comment on the latest GSE capital proposal, citing concerns about its potential impact on the cost and availability of mortgage financing. If fees increase, lenders would likely pass on the extra cost to consumers. Fannie Mae and Freddie Mac buy and guarantee securitized loans that represent a significant portion of mortgages originated in the United States, so their policies have an enormous impact.
Overall, Layton gave the FHFA's proposal a mixed review during a recent Harvard webinar.
He said if the FHFA's intention is to concentrate credit risk back into the GSEs the way it was prior to 2008, it "kind of works." He conceded that the proposal's higher capital requirements for Fannie and Freddie also make sense.
But Layton was critical of the costs involved in raising the capital relative to the benefits received from exiting conservatorship.
"I think there's materially increased systemic risk offset by capitalization in a very expensive way," he said.
The Community Home Lenders of America and the Community Associations Institute want the FHA to insure loans on condos approved by Fannie Mae and Freddie Mac.
The Federal Open Market Committee's decision to reduce interest rates for the first time in nine months lifted bank stocks Wednesday. The 25-basis-point reduction could lead to net interest income headwinds now, but loan growth later, analysts said.
Most lenders said they had already priced in the widely-anticipated decision to cut short-term rates for 30-year home loans but other products will benefit.
The deal for the Class A office building owner will be funded from Rithm's cash as well as liquidity on the balance sheets, plus possible co-investors.
The government-sponsored enterprise is making changes to mortgage-backed securities and servicing disclosure files to support use of the advanced credit score.
