The Big Short
At the end of the Bush administration, on September 6, 2008, the GSEs were ordered into Conservatorship. Think about this for a moment. This means that any loan originator, processor, appraiser, underwriter, in his or her early 30s likely never even knew what Countrywide meant to lending. What a WAMU was. Or what a Neg-Am-Teaser-Rate-No-Doc-COFI-ARM was. The failures of our industry that led to the collapse of the likes of Lehman Brothers are a complete unknown to a generation that has come into the workforce since the Great Recession.
Unless they watch “The Big Short” or studied this period in an Econ or business class in college, the entire period is not even a memory. To those of us at Mortgage Media, the memories remain fresh in our minds. For those “of age,” we have been debating what to do with the GSEs for years. And given the importance of the events of the week, we start here.
This week, both Congress and the White House took aim at resolving the conservatorship and showed a renewed determination to finish the job. This is something neither the Obama administration nor its congress were able to do.
Two events kicked off this process, which promises to be a long one, no matter how quickly plans can be agreed to.
First, Chairman Crapo held two days of hearings on the issue in the Senate banking Committee. Mortgage Media published a summary of these hearings covering the key points made from all sides over the two days.
Then, in a long-expected move, the President signed an order instructing both Treasury and HUD to develop respective plans for reform of all federally-supported loan programs. In what may become a “boil the ocean” process, he instructed Treasury to develop a plan for ending the conservatorship, and called for consultation with the cabinet level administrations at HUD, Agriculture, Veterans Affairs, as well as the non-cabinet level FHFA and CFPB. He instructed HUD to do the same for their programs, and required the same consultation structure.
For the GSEs and HUD, he set expectations. For the GSEs, the White House calls for increased capital, a fee for the guaranty, limits to market activities, and considerations of scope and role for both the single- and multi-family businesses. The order established commitments to preserve the 30-year fixed rate, provide access to all business models, and preserve the cash window.
For HUD, it called for a review of the HECM program, down payment assistance programs, and modernization needs. In total, it is clear that the effort is intended to identify risks, but also overlaps that can cause adverse selection. In both cases, they are instructed to develop a plan and identify what requires legislation versus administrative action. We encourage everyone to read the full order here.
In either the case of the President’s Order or Congressional Action, the challenge is large. Isaac Boltansky of Compass Point stated it well in his analysis of the week by highlighting the bullish and bearish case:
- Bullish Signals for Ending GSE Conservatorship. We view the following as bullish indicators for the Trump administration’s effort to end the GSE conservatorships: (1) the March 27 memo is the first instance of President Trump explicitly calling for the conservatorship to end; (2) the White House statement and the forthcoming plan signals a prioritization of the issue; (3) the Trump administration already controls both ends of the Preferred Stock Purchase Agreements and their FHFA Director nominee should be confirmed in the next month; (4) the White House’s memo is as much as could be expected at this stage given that Mark Calabria’s nomination to head the FHFA is still pending in the Senate; and (5) after two days of mortgage finance hearings in the Senate Banking Committee, it is painfully clear that a comprehensive legislative solution will not be crafted by this Congress.
- Bearish Signals for Ending GSE Conservatorship. We view the following as bearish indicators for the Trump administration’s effort to end the GSE conservatorships: (1) the White House’s directive for a framework does not have a clear timeline and we believe it could take until the end of 3Q19 to release a plan; (2) although the White House’s mortgage memo is a thoughtful consideration of the topics, there is still a significant difference between a list of issues and an actionable plan; (3) the forthcoming plan will bifurcate between legislative and administrative actions, but there are some on Capitol Hill who are concerned that an administrative strategy will usurp their legislative authority; (4) although we are not as concerned regarding reports of Trump administration infighting, we believe the complex and contentious nature of these issues could make navigating policy differences between the UST and FHFA difficult; and (5) we continue to believe that the associated transition risk complicates the conservatorship calculus, especially given that housing housing represents ~15% of GDP.
We will of course be joining the many views and analysis looking at the prospects for progress, the risks and opportunities, and perspectives from others as we report on this going forward.
Tightening Guidelines at FHA
FHA announced a series of guideline changes, most of which will improve the risk profile on its programs. As Ken Harney published, “First-time and move-up home buyers with heavy debt loads, low credit scores and small down payments face a daunting new mortgage hurdle: The Federal Housing Administration is toughening its underwriting standards. Large numbers of applications could be turned down in the coming months as a result.”
He reports that these moves could restrict lending somewhere between 10-30 percent of borrowers. Why is HUD doing this? Easy, average FICO scores have fallen to the lowest levels since 2008, and DTI’s over 50% are highest since 2000. Here is just one look at DTIs from MBA Chief Economist Mike Fratantoni in this slide:
Clearly, while DTIs are trending higher, an issue to be more closely studied, the steep rise in FHA DTIs, followed only by VA, should send risk warnings to any observers concerned for long term viability of the FHA program. We view the moves by FHA as positive and applaud FHA Commissioner Brian Montgomery.
New CEOs for the GSEs
Mortgage Media applauds the appointments of David Brickman at Freddie Mac and Hugh Frater at Fannie Mae to the role of CEO.
David Brickman was named President of Freddie Mac in 2018 after a leading the multi-family business at Freddie through an incredible growth run, taking the MF business from $18bb to $80BB in just about eight years. David is credited with the creation of the K structure, a product that has literally transformed the multi-family business into a formidable competitor in the marketplace. David is well known to Mortgage Media and we look forward to his steady and inspiring leadership in the years ahead.
Hugh Frater has served on the Board of Fannie Mae since 2016. Hugh has a long background in commercial and multi-family finance, having worked at Blackrock, PNC, and then heading Berkadia – a company in the Berkshire Hathaway family. After retiring, he took some time before joining the Fannie board. Hugh was an active leader on the Mortgage Bankers Association Board of Directors during his tenure at Berkadia and is known as a thoughtful, disciplined, and inspirational leader. Like with David Brickman, we look forward to his leadership in the years ahead.
Mortgage Media recognizes that this week we are unusually focused on the GSEs and HUD, but this is a reflection of the leading issues of the week.
MBA Technology Solutions Conference
The new buzzwords at the the MBA Tech Conference in Dallas this week were data privacy and blockchain. The slightly shopworn buzzwords were digital mortgage and artificial intelligence. The unspoken buzzword was data security. Follow us in the coming weeks for interviews with CIOs and key vendors waxing sometimes eloquently about these technologies, and why the tech evolution in mortgage banking moves at a glacial pace.