“Be careful what you ask for, you just might get it”, was a lesson my Dad always drilled into me.
I would suggest that the risk is rising fast that this administration curtails the competitiveness of the GSEs versus bank portfolios, new forms of PLS, and the programs offered by FHA, VA, & USDA.
Todays analysis by Isaac Boltansky is a well written review of Mark Calabria’s interview on Fox Business. Isaac predicts moves that will impact pricing and product availability – it is worth a read in its entirety. What stakeholders should be concerned with here is the timeline laid out by Mark. With his estimates of revisions to the PSPA this year and ending of the conservatorship, the downside risks to industry are significant.
Here are some concerns:
- The GSEs are already getting squeezed on sub-80% LTV execution by better whole loan pricing of GSE eligible products by banks and some PLS transactions. On high LTV product with FICOs below 740, the combination of LLPA’s and MI make FHA better execution. This leaves the GSEs with superior execution on 740+ FICO and loans in the 75%-80% LTV bucket.
- If Mark sets a higher capital standard, say 4-5% as he suggests in the Fox interview, the cost of capital will transfer into guaranty fee pricing. This means that the best execution will likely result in an even greater trade away from the GSEs.
- Isaac also expects that Calabria will begin to narrow the footprint. This would likely include cash out refinance, second homes, investor property. For more on how that might happen, I suggest reading this piece by Jim Parrott. It also suggests moves to pull in their multi- family market share.
- If the plan to release from conservatorship excludes congress, then the only option is to revert to the implicit guaranty as provided in the charter. My expectation is that MBS pricing would then worsen because, regardless of spin, an implicit guaranty likely will not be viewed in the same manner as is provided in conservatorship with the LOC backstopping these companies. Any erosion in demand for MBS, especially from entities in sovereign nations due to a perceived weakening of a AAA rating, will worsen pricing more, making them still less competitive.
The list of risks here will threaten any lender without a balance sheet. Those who depend on an exit strategy to the secondary market will likely see their options narrow and pricing worsen. This primarily would impact smaller community banks, credit unions, and independent mortgage bankers.
As Boltansky lays out in this chart, the regulator, in coordination with Treasury, has the ability to do many things but falls short of affirming an explicit guaranty or any changes to the charter which is the construct of the implicit backstop.
To date, many have warned of reforms that would benefit the “TBTF banks.” Unfortunately, the risks of this suggested set of actions under Mark Calabria’s leadership will result in precisely such an outcome. Indeed, administrative recap and release is likely to have a significant adverse outcome on all lenders but the TBTF banks.
In a complimentary analysis, Moody’s Analytics looks at recap and release and reaches this conclusion, “The most significant administrative action would be recapitalizing and releasing the GSEs from conservatorship without legislation, which would likely be credit negative for the GSEs because of uncertainty about how privatization would occur.”
Perhaps this is why the editors of Bloomberg published their opinion last week arguing that the status quo was the perhaps the best option and that GSE’s should be left alone in conservatorship for now.
The debate will continue, but one point of irony may be that those hurt the most from the steps that might be taken by this new Director and Treasury through recap and release, might be the very group of small banks and non-banks who have been making arguments in favor of just that.
For stakeholders, the recent perspectives of Boltansky, Bloomberg, Moody’s, and Parrott should be required reading in order to form an informed opinion as to downstream risks and opportunities.
David H. Stevens, CMB, is an Advisor to Mortgage Media. He has held various positions in real estate finance, including serving as SVP of Single Family at Freddie Mac, EVP at Wells Fargo Home Mortgage, President and COO of the Long and Foster Realty Companies, Assistant Secretary of Housing and FHA Commissioner, CEO of the Mortgage Bankers Association.