It’s not an easy time to be a lender, or a servicer. Leaders of Fannie Mae and Freddie Mac addressed the challenges the mortgage industry is facing in the rising rate environment at a session Tuesday at the MBA Annual Secondary Conference.
Andrew Bon Salle, executive vice president of single-family business at Fannie Mae, and Dave Lowman, executive vice president of single-family business at Freddie Mac, outlined the ways their companies are trying to help lenders and servicers in the midst of decreasing volumes.
Fannie Mae is forecasting a drop of 20% in origination volume, with a drop in the refi mix of business from about 50% last year to just north of 30% this year. Likewise, Freddie Mac is forecasting a 25% drop in the overall market.
On the front lines, the clients of the GSEs are feeling the same pain — maybe worse. Lowman reported hearing one lender with volumes off up to 45%.
The drop in volume correlates mostly to rising interest rates, but Lowman also noted the effect of tight home inventories, keeping some potential homebuyers on the sidelines.
“I believe there are more people who could be in the market buying homes, particularly for the first-time homebuyer,” Lowman said.
Bon Salle also noted that looking forward, the geopolitical risks in East Asia and instability within Europe could cause consumer confidence to fall, depending on how current events unfold.
The challenges are creating a “new normal” for those in the industry, the leaders said.
“The decrease in volume causes folks to focus on what it costs to run their business and how to do things more efficiently,” Lowman said. “On the servicing side, we’re starting to see the same thing. As we went through the crisis, we built a huge infrastructure to deal with troubled borrowers. That’s a melting ice cube, thankfully, but now they have to figure out how they service loans more efficiently.”
Lowman noted that those in the default business were looking to change the compensation structure of their business, but he was clear that he didn’t see the possibility of that getting done in the near future. “While that is on our scorecard, now is not the time for us as an industry to take that on.”
Bon Salle said the best way for Fannie Mae to help its customers is through innovation.
“Competition is fierce,” Bon Salle said. “Our customers want business solutions that help them be more competitive, that make the process simpler and reduce costs.
“The thing that excites me most right now is that they are very focused on the competitive advantage they can gain by how they engage with borrowers. Our customers are actively exploring solutions around the borrower.”
Bon Salle said Fannie Mae is meeting that desire for smart solutions with programs like Day 1 Certainty, which can cut the time to close a loan in half — from 70 days to 35. But the real goal, he said, is reducing that timeline all the way down to 10 days. On the servicing side, Fannie Mae wants to help reduce servicing costs by up to 50%.
“We don’t have all the answers on how to do that, but we are continuing to improve the process of manufacturing loans,” Bon Salle said.
On the Freddie Mac side, Lowman said the company wants to leverage the “unbelievable” amount of data the company has to reimagine the mortgage business. Freddie Mac marries the data it receives through the uniform data sets with publicly available data to provide solutions like its Loan Advisor Suite.
“We are also focused on how to reach the borrower of the future,” Lowman said. “We have developed products that meet the needs of those consumers, including the Home Possible and Home Possible Advantage programs.”
As Lowman pointed out, the borrower of the future is likely to be Hispanic, since Hispanic households are projected to make up more than 50% of household formation in the next 10 years.
On the question of how the Federal Reserve will start reducing its balance sheet, both Lowman and Bon Salle think that the Fed will be very mindful of the impact it could have on the mortgage industry.
“It could be a big deal, with a massive impact on our industry,” Bon Salle said. “There is a lot of discussion in the capital markets about what the Fed is going to do. I think they are going to be careful as they move forward to deleverage the balance sheet.”
One of the biggest questions voiced in different sessions of the conference is the status of the single security. On that topic, both leaders claim that the GSEs are working hard together to implement the next piece by the new target date of the second quarter of 2019.
“It’s a massive project,with three parties working together to make this work,” Lowman said. “We’re doing everything we can to lessen the impact on the industry.”
The leaders discussed their efforts to transfer risk to the private sector, including developing markets for transferring that risk, as well as tools. Lowman noted that Freddie Mac innovated different ways of distributing the risk, including to international entities. Bon Salle noted that the risk transfers were taking place in a very good economic environment, so Fannie Mae would have to watch for challenges as the markets change.
“We have made a ton of progress in a very short time, but there is still much to do,” Bon Salle said.
Answering a question from the audience, the GSE leaders addressed their neutral stance on the correct rate of homeownership.
“We’ve seen rates turn down, but it’s not one of our targets or focus,” Bon Salle said. “Borrowers have the option to own or rent, and we don’t think it’s our job to choose for them. We know the challenges with low income borrowers and we want to give lenders the confidence to lend to folks at the bottom.”
“We don’t have a goal inside Freddie Mac around trying to influence homeownership rates. If you go back and look at what happened through the crisis, maybe homeownership rates were artificially high — people were put in homes that were not ready to be put in homes,” Lowman said.
“It’s really important as an industry that we do anything we can to put people in homes where they can sustain themselves. Renting is OK, and we provide a lot of financing on great projects for folks who are not ready or just don’t want to own a home.”