Greater clarity around repurchases and a new set of affordable lending products went a long way toward improving bankers’ relationship with the government-sponsored enterprises (GSEs) this year, though memories of crisis-era buybacks linger like a bad champagne hangover. In the New Year, forget all those resolutions to wind down Fannie and Freddie; they’re here to stay – at least for now.
For all the talk of privatizing Fannie Mae and Freddie Mac, the two GSEs still play an enormous role in the mortgage business. In the third quarter alone, they collectively pumped well over $200 billion in liquidity into the mortgage market.
And bankers said that new programs aimed at first-time homebuyers and greater clarity around repurchases have helped to patch what was once a troubled relationship.
“There are still some challenges with regard to the relationships between banks and the government sponsored enterprises and that’s primarily because of the pre-crisis,” said Simon Tahan, senior vice president and director of mortgage banking at Webster Bank. “There’s still a lot of paranoia about buybacks, but things are getting better, I’m pleased to say.”
Moreover, he said, the GSEs have opened the credit box, easing standards for borrowers with less-than-perfect credit, allowing up to a 97 percent loan-to-value ratio for some affordable lending products, and limiting loan-level price adjustments for creditworthy borrowers.
“The good news is, we have seen now the GSEs have moved with regard to the credit pendulum,” Tahan said. “There’s a little bit more ease of credit, and Fannie and Freddie have come slightly out of the box with regard to credit and treatment of certain types of obligations and assets.”
That expanded menu has been particularly beneficial for community banks, many of which might not otherwise have access to the capital markets without the government-sponsored enterprises.
Mike Sheahan, retail lending manager at Chelsea Groton Bank, said the bank had not been challenged by buybacks from the GSEs. Furthermore, he said the bank was enthusiastic about integrating Fannie’s new product into Chelsea Groton’s own suite, anticipated in the first quarter.
It’s also created a kind of “ripple effect” for community banks like First County Bank in Stamford, said President and COO Robert Granata.
Fannie and Freddie “making any move to ease the burden on first-time homeownership is something that we applaud – and that helps the entire market,” he said. “We look at this as not necessarily just first-time homebuyers, but the whole market across all sectors. Those who are selling this smaller first-time home are probably going to buy up and get a larger house, those who are selling larger homes are scaling down. … It’s a host of business that we can take advantage of.”
Leveling The Playing Field
Meanwhile, Fannie and Freddie will continue rolling out a new common securitization platform mostly intended to level the playing field a little bit on the trading floor.
“If you think about what’s been going on between the two GSEs, they’re largely the same, but their securities trade much differently in the market,” said Scott Haymore, TD Bank’s head of pricing and secondary markets.
Referring to Fannie’s 54-day delay versus Freddie’s 44, he said, “Theoretically, Freddie should trade higher than Fannie, but it never has.”
Fannie and Freddie, it seems, don’t rank among community bankers’ concerns for the mortgage market in the year ahead. While praising the GSEs’ efforts to provide more affordable borrowing options, Granata did mention TRID as a potential concern in 2016, albeit noting it was not an issue for his bank.
“One of the other piece that they’re monitoring are all the changes in TRID,” he said. “Those TRID changes could cause a slight ripple effect for banks that are selling to them.”
Concerns also linger about interest rates; though the Fed bumped its key interest rate just 25 basis points, Haymore expected that would be enough to dampen origination volume and shake out whatever few refinance business might actually still be left.
“Most economists have been calling for rates to go up and for all of us in the mortgage industry, that means we’ll all be competing for much lower origination volume,” he said. “That’s the worry.”
Bankers are certainly a cautious bunch and not likely to forget the sins of the crisis anytime soon, but Tahan said he’s hopeful for the year ahead.
“It’s great to see what Fannie and Freddie have done in 2015, really moving the pendulum and providing a little bit of ease of credit. I’m encouraged that we’ll see more good work done by them,” he said. “I think there’s a lot of work that still needs to be done but there’s clearly a lot of good dialogue moving in that direction.”
