MAXEX Featured in GSE Reform Article

MAXEX Chairman and CEO, Tom Pearce, shares his thoughts on GSE reform along with data analysis provided by the MAXEX team.

Tom Pearce, MAXEX CEO and Chairman, was featured in this article, posted on National Mortgage News about GSE reform.

Where GSE Reform Could Be Headed and What it Could Mean for Lenders
By Bonnie Sinnock

Government-sponsored enterprise reform has long been a contentious topic in Washington, D.C., one that has proven particularly resistant to bipartisan collaboration.

But since becoming Federal Housing Finance Agency director, Mark Calabria has sent ever clearer signals that the White House is prepared to take unilateral action that would at least start Fannie Mae and Freddie Mac back on the path to private-sector ownership.

Now, with a Treasury Department report on administrative and legislative solutions to ending the conservatorship of Fannie and Freddie slated for release in the first weeks of summer, it is possible that the U.S. financial services industry will indeed need to prepare for a fundamental overhaul of the nation's housing finance industry.

There is no shortage of ideas about steps the FHFA could choose to take, such as creating incentives to redirect mortgages currently sold to Fannie and Freddie to different buyers or establishing initiatives to lay the groundwork for a multiple guarantor system.

What follows is an exploration of a range of some potential reform scenarios, with a focus on the likely impact on various categories of lenders and thoughts on what industry participants can and should do to prepare themselves.

Some unilateral options
There is a consensus that the FHFA could take some initial steps on its own. One such option would be to adjust pricing for loans outside of those considered central to the GSEs' affordable housing mission in a way that could potentially increase private market competition for those products.

"It feels like there's going to be reduction in the footprint of Fannie and Freddie. I think they're going to make some incremental changes such as increasing the g-fees on certain types of loans," said Tom Pearce, CEO and chairman at MAXEX, a private market trading platform that also reviews, rep and warrants sellers' loans. Those could include investor properties, second homes, cash-out refinances, loans with debt-to-income ratios above 43% and some high-balance loans, he said.

In dollar-volume terms, such a step would be consequential. For context, second homes and investor properties combined made up 13% of the dollar volume of mortgages sold to Fannie and Freddie in 2017, according to GSE data analyzed by MAXEX. When combined with high-balance loans — with a balance of $450,000 or more — as a possible differentiating factor, loans in any one or more of these categories made up a little over half of their dollar volume that year.

The FHFA director has shown an interest in preserving current loan limits and maintaining guarantee fee parity, but Pearce and some others still think the FHFA could call on Fannie and Freddie to reprice conforming jumbos. The impact of that would have its primary impact on high-cost markets, which would address concerns Calabria has voiced about the concentration of GSE loans in markets like California and other pricey locations.

Other steps Calabria might contemplate would take longer to implement. For example, the agency also could direct Fannie and Freddie to reduce their prices for loans outside of the qualified mortgage definition, which is delineated by, among other things, a maximum 43% debt-to-income ratio.

But that change would almost certainly have to wait until the qualified mortgage patch expires, something that isn't scheduled to happen until after the next election.

The so-called patch refers to a temporary exemption Fannie and Freddie have from the need to make loans in line with the QM definition in order to get a safe harbor from ability-to-repay rule liability. It's supposed to expire in 2021 or whenever conservatorship does.
Calabria has made it clear the existence of the patch is a problem — one he would like resolved before 2021.

"The primary problem is that you've got one set of rules that applies to everybody else and one set of rules that applies to Fannie and Freddie," he said in an interview in April.

However, as Calabria himself acknowledges, the fate of the QM patch is ultimately in the hands of the Consumer Financial Protection Bureau.

Overall, Calabria said the best outcome would be for the CFPB to change its approach to Qualified Mortgages in the first place.

"To me, fixing a lot of the problems with QM will alleviate the need for a patch," he said. "I want to ... see the two converge in a place where everybody is under the same set of rules."

This would address the fact that most government-insured mortgages have a QM exemption with no expiration date as well.