Mortgage Bankers Association president and CEO David Stevens is pressing hard for the agencies’ risk-sharing initiative to be done soon and on the front end, citing consumer advantages and rebuttals of the rationale for higher fees at the agencies that he hopes could lead to a reduction in them.
Among the reasons cited for higher agency guarantee fees is to “crowd in private capital” in terms of pricing, something Stevens said at the group’s National Secondary Market Conference last week may be less necessary if private capital were able to return through front-end risk sharing instead.
And at the conference in New York, executives from a real estate investment trust and a mortgage insurer—which are among the types of entities he suggested might fulfill those roles—were supportive. Genworth U.S. Mortgage Insurance president and CEO Rohit Gupta indicated, when asked about it his company’s press briefing at the conference, that mortgage insurers are “well aligned” with the MBA on this. Also Byron Boston, a former Freddie Mac portfolio manager who is now president and chief investment officer of mortgage REIT Dynex Capital Inc., told this publication his company would be interested in a risk-sharing role on the front end or back end. Although there likely would be some kinks to work out, either one would be doable, he said.
Stevens, a former regulator, said he expects “some pushback” on this effort on the government side, as their naturally is due to mixed feelings about scaling back the public entities’ roles as well as concern about counterparty risk, but he is “still hopeful.” The concept has been greeted with questions about whether private capital will really be there to fill the role, he said, and Boston said he has joined Stevens in assuring government officials that it would be.
Stevens said he believes an “if you build it, they will come” approach is needed to help make the move a reality, suggesting mortgage market participants might want to start working on ways they can step in to demonstrate they would be there to support the concept and show how it might be done. He said this and other more concrete moves to scale back the agencies in line with regulatory aims to decrease government’s involvement in the mortgage market need to be made soon. “If we don’t move quickly, the will to do so will go away,” said Stevens.
The move would not necessarily have to be complicated. An MI, for example, could insure more than the typical 20% of the loan balance, limiting the risk the agencies would have to be responsible for to “catastrophic” risk.
Although Stevens wants a front-end move, others have set their sights on the back end. One possible concept is what Freddie Mac has done in other contexts, where it guarantees the senior portion of the transaction and the private market takes responsibility for the subordinated risk. But Stevens finds “no consumer benefit” to this approach and calls it “less transparent.”
Risk-sharing concepts are being floated in response to the Federal Housing Finance Agency’s 2013 Conservatorship Scorecard for Fannie Mae and Freddie Mac. This calls for each to, among other things, “demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion of unpaid principal balances in 2013.”
As previously reported by Brian Collins, the acting director of the FHFA has named MIs as likely participants in its risk-sharing initiative. President Obama has nominated Rep. Mel Watt, D-N.C., to replace acting director Ed DeMarco—but Watt’s chances of being confirmed are in question.
Other types of agency reform Stevens has been pressing for include more urgency in terms of his call for a potential “single security.” Although the FHFA’s plan for a single securities platform is separate from this, the common platform could possibly accommodate it, Paul Mullings, SVP and interim head of Freddie Mac’s single-family business, said in response to a question about it at the MBA Secondary.
He referred questions about the front-end risk-sharing plan to a Freddie spokesman, who provided a statement saying, “We plan to issue pilot transactions this year to demonstrate the viability of multiple types of risk transfer transactions before setting up a more systematic approach. We are working with the FHFA on these transactions and other strategies to bring private capital into the market in 2013.”
