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 Consumer Financial Protection Bureau released a proposed version of the consent order on Jan. 17 and the company involved said it was finalized that day.
Bright Financial denied the allegations that the company and its affiliates paid kickbacks to real estate brokers and agents in exchange for referrals.
President Trump reinstated a revised executive order from his first term that would make it easier for the White House to remove policy-facing federal employees — including Senior Executive Service employees. The National Treasury Employees Union sued the White House in response.
Mortgage companies are looking for ways to open up credit to more borrowers, but insurance-cost spikes have made a difficult situation more challenging.
