Current leaders in Washington could scale back the role Fannie Mae and Freddie Mac play as servicing, lending and technology innovators, particularly if officials follow through with plans to remove the duo from government conservatorship.
The two have played a key role in developing new loss mitigation strategies since the pandemic forced them to, sometimes on the fly; but they're in a good position now to take more of a back seat, said Faith Schwartz, founder and chief executive of advisory firm Housing Finance Strategies.
"I think it's highly unlikely they're going to support innovation the way they used to because they'll read the mission and charter and decide what they are supposed to do and what do they not need to do," she said at the Mortgage Bankers Association's servicing conference.
Proactive pursuits of advances in automation also could be rethought, said Schwartz, noting she has been involved in
"I believe those days will be slightly behind us, just because I think the administration thinks private capital should be leading the way on innovation," she said.
There also will be a lot of re-examination of pilot activity like Freddie Mac's
"I think they'll look hard at all their pilots, probably, just trying to make sure they're not creeping into the primary market or private capital," Schwartz said.
In trying to do more to make sure they don't impinge on private capital, the GSEs also could offer less favorable loan-level price adjustments for certain loans considered outside the scope of their housing mission.
"I think even in jumbo conforming there can be an argument for higher LLPAs," said Isaac Boltansky, managing and director of policy research at BTIG, commenting on a move that could increase consumer interest rates for loans in areas with high average housing costs.
Treasury Secretary Scott Bessent recently
That said, there are reasons that Fannie and Freddie might not want to shed some non-core loans that are more profitable for them as they attempt to build up enough capital for a release from the conservatorship agreements they have with the U.S. government.
Bob Broeksmit, MBA president and CEO, said Fannie, Freddie and their regulator have sometimes alternated between pressuring mortgage banks for loans needed to fulfill certain mission goals and then demanding more profitable products like seconds and investor loans.
Boltansky said the GSEs' departure from conservatorship is by no means certain.
"The more you see Congress involved, the less likely it is to happen," he said.
Administrative action is do-able but has challenges too, Boltansky said.
"We need to see the government say that they are going to address the $330 billion in liquidation preference of the senior preferred that's on the capital stack at Fannie and Freddie, that is owed to Uncle Sam," he said. "If you want to do anything with the capital stack, that needs to be addressed, and look, there are 85 different ways from Sunday to do it. Just ask any investment banker, right? But there's a big decision that has to be there that has to be made there and that's one that I think is going to involve some time."
Broeksmit noted that it might be tricky to execute without it looking like the U.S. government is giving up something of value to Fannie and Freddie.
Boltansky agreed it will be a difficult balance to strike but possible and necessary to actually execute an exit.
"That's the most important thing we need to see," he said.
