These are strange, confusing times in the mortgage industry. On the one hand, we have an administration in the White House that is dead set on rolling back financial regulation, yet it can’t seem to get anything done in that area because its proposals lack the needed support in Congress. Plus, there are a million other distractions occurring both domestically and globally that are constantly causing regulatory rollback and government-sponsored enterprise (GSE) reform to fall back to the bottom of the pile.
Practically every week, we see headlines to the effect of “Dodd-Frank Needs To Be Rolled Back Now,” yet proposals like the Financial CHOICE Act currently don’t appear to stand a chance in the Senate, where measures need a minimum of 60 votes in order to even get voted on.
We also keep reading that “GSE Reform Needs To Happen Soon,” but, as far as the White House and the Republican-led Congress go, we don’t seem to be much closer to achieving that either. Yes, there are some solid proposals out there: In April, the Mortgage Bankers Association (MBA) unveiled its plan for GSE reform, which has generally seen strong support from the industry. But GSE reform remains an incredibly dense and complex topic for Congress to tackle – and it would seem that with all of the other things going on, it’s unlikely that our elected officials will have time to dissect the proposals that are currently on the table and come away with a definitive plan.
At the same time, there is an increased urgency right now for GSE reform to happen soon. In mid-May, Mel Watt, director of the Federal Housing Finance Agency (FHFA), told members of the U.S. Senate Committee on Banking, Housing and Urban Affairs that Fannie Mae and Freddie Mac need to be recapitalized and taken out of conservatorship as soon as possible because, starting in 2018, there is a risk they could need Treasury draws if they sink into the red. That’s because, as of Jan. 1, 2018, the amount of “buffer” that the GSEs have for their operations under their Senior Preferred Stock Purchase Agreements (PSPAs) with the U.S. government will shrink to zero.
“At that point, neither enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support,” Watt told the committee.
Although Watt said he believes that comprehensive GSE reform should be entirely up to Congress, not the FHFA, he indicated that his agency will likely start recapitalizing the GSEs over the next few months while plans for the transition are being developed. He emphasized that the FHFA would do this not to help facilitate proposed (and controversial) plans to “recap and release” the GSEs, but rather to ensure that the companies have adequate buffers to prevent treasury draws.
“[The] FHFA has explicit statutory obligations to ensure that each enterprise ‘operates in a safe and sound manner’ and fosters ‘liquid, efficient, competitive and resilient national housing finance markets,’” Watt told the committee. “To ensure that we meet these obligations, we cannot risk the loss of investor confidence. It would, therefore, be a serious misconception for members of this committee, or for anyone else, to consider any actions [the] FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release. [The] FHFA’s actions would be taken solely to avoid a draw during conservatorship.”
As I said in my last editorial, the lack of certainty with regard to GSE reform and regulatory rollback is resulting in a lack of certainty over where the mortgage market is headed. Yes, mortgage lenders are generally supportive of relaxing some of the regulations that were put in place following the crisis, but as is to be expected, the devil is in the details: Which parts of the Dodd-Frank Act and/or which parts of the Consumer Financial Protection Bureau’s rules pertaining to mortgage origination should be eliminated or changed? And what is the correct process for doing that? The same goes for GSE reform: Everyone has got to be on the same page.
Meanwhile, the market fundamentals aren’t looking all that bad: Unemployment is at pre-crisis lows, wages are starting to finally inch up, home prices continue to rise, mortgage rates continue to hold at near-historic lows, and consumers are generally positive about the housing market. We’ve even seen some indication that economists’ forecasts for home purchases this spring were accurate – for example, the National Association of Realtors recently reported that April existing-home sales increased 4.4% compared with March, and the MBA’s Mortgage Applications Survey shows that purchase volume has been steadily increasing since the end of February.
All the mortgage industry can do, for now, is stay focused on the regulations that are in place and try to capitalize on the market dynamics that are in play. At the same time, everyone in the industry needs to keep close tabs on the legislative proposals that are on the table. Now is not the time to sit on the sidelines. The industry must be actively involved in the legislative process if it is to have any control over its destiny.