Testimony Wednesday at the House Financial Services Committee called together a nice range of mortgage finance players. From the big-time originators and secondary market players, to academics and finally the trade groups, the industry was fairly represented.
It is something HousingWire follows very closely, especially in determining the future of the government-sponsored entities — those institutions charged with keeping housing affordable.
Lately, keeping housing affordable is equated to keeping mortgage rates low.
But there is little policy basis to this. The star of the show so far is undoubtedly Ed Pinto, the former chief credit officer of Fannie Mae, someone whom most readers of this column may know.
Pinto’s comments proved to be some of the more valuable information being presented: “Rates go up and down all the time. Over my career, mortgage rates have gone from 9% in 1974 to 18% in 1981 to near 4% today,” he said.
Demand for homes in 1974 and 1981 was not as low as it is currently — though granted prices were.
Additionally, keeping rates low may keep housing more affordable, but it’s clearly to the detriment to the private-label secondary market.
Consistently maintaining low costs to the borrower is not encouraging home sales, as an article in USA Today notes. But keeping mortgage rates low does reduce any chance of profitability in the RMBS market.
Further, Dodd-Frank prohibits pre-payment penalties. However, these penalties serve as a risk hedge in private label RMBS. Pinto also suggested that these fees should be reinstated to help ensure the 30-year mortgages take 30-years to amortize.
Let’s not forget the big four in all of this. They would like nothing more than to restart their RMBS series from years back. As far as they are concerned, mortgages originated during the homebuyer tax credit do not carry nearly the same risk as loans from the housing boom.
They are no doubt looking to monetize those loans, in order to free up private liquidity to perhaps originate more loans. But at some point interest rates will have to show a clear profit — an incentive to bundle into securitzation.
After all, as seen with the recent UK RMBS RBS master trust Arran, a single deal can help to respark an industry.
But there needs to be clear support for this. When asked if the GSEs should be dissolved tomorrow – and told to answer ‘yes’ or ‘no’ – Pinto responded that he would be in favor of that as long as “Congress’ feet are held to the fire so that you won’t back down from your commitments.”
But in a healthy private securitization market, with a foundation of higher interest rates and more stable performance, we won’t need to hold Congress, or anyone else’s, feet to the fire.
Jacob Gaffney is the editor of HousingWire.
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