More than Fannie, Freddie block return of private mortgage market

As the U.S. government draws plans for the future housing finance system, academics, trade groups and analysts are urging officials to scale down their role in Fannie Mae and Freddie Mac to make room for the private market. But the nascent return of the private mortgage market may not immediately flourish if that happens, said Sarah Wartell, executive vice president at the Center for American Progress in testimony Wednesday before the House subcommittee on capital markets and government-sponsored enterprises. The Treasury Department will release a white paper later this week recommending to Congress what should become of Fannie Mae and Freddie Mac. A recent letter from the American Bankers Association and a proposal Moody’s Analytics Chief Economist Mark Zandi’s both said a healthy mortgage market will be mostly financed by the private sector. The ABA said they should fund roughly 60% of all mortgages, while a report from FBR Capital Markets showed the private market’s share could be closer to one-half. Wartell agreed saying that the private sector should serve more of the need so long as it does not destabilize the market. Though, she argues, the market is already destabilized with one residential mortgage-backed securities deal coming from the private side since the 2008 financial crisis. That would be a $238 million deal by Redwood Trust, consisting entirely of jumbo mortgages. Wartell said in her testimony that she sees “a variety of important barriers to private securitization” with the first being the “necessity of clarifying the rules implementing the Dodd-Frank Act.” As regulators draw up rules detailing what loans originators will retain the risk on and which ones the won’t, known as qualified residential mortgages, the private market can only way. Early indications are that any loan written with less than 20% down will not qualify, and banks will have to retain a 5% credit risk once they securitize those mortgages. Banks are lobbying to get that down to 10%, but Wells Fargo (WFC) has asked regulators to push it even higher to 30% down. “The sooner that these rulemaking processes are complete, the sooner the ground rules for securitization will be clear and the sooner investors are likely to return. Those who would delay these efforts undermine the certainty they claim the markets desperately need,” Wartell said. The second barrier will be the lack of investor confidence with MBS. Restoring that trust, Wartell said, will require that the besieged mortgage servicers straighten out a variety of issues including robo-signing, title problems and even their remittance reports to investors regarding the details of the loans in these securities. While many testifying before the subcommittee Tuesday suggested also lowering the conforming loan limit at Fannie and Freddie, Wartell warned that because the private market is still struggling to find its legs after the crash and in the midst of regulatory uncertainty, making drastic changes could constrain credit even further than it was in 2010. But Anthony Sanders, a scholar at the Mercatus Center at George Mason University and a real estate finance professor, argued against Wartell’s testimony. In a statement he sent to HousingWire, he said the government is no longer needed to fund the 30-year fixed-rate mortgage market. “Government leviathan is not needed or wanted, at least by those that celebrate fiscal responsibility. We have to bear in mind that Fannie, Freddie and FHA have almost 99% of the mortgage market. This is the problem when government is allowed to crowd out the private sector. It is going to take time to get the private sector back into the game, particularly given the financial condition of many large banks,” Sanders said. Still, Wartell warned that action taken to quickly could harm the market and even the economy in the near term. “They must not come before we have certain essential pieces of a new system in place so that the private market is in a position to take their place and we do not experience unnecessary shocks to the broader economy,” Wartell said. Write to Jon Prior. Follow him on Twitter: @JonAPrior