The state of the mortgage industry is rife with concern as elevated rates and low inventory have stunted both refinance and origination activity. As a result, the makeup of the mortgage ecosystem is shifting.
Private correspondent aggregators play an essential role in the upkeep of a balanced mortgage ecosystem. While this term may be unfamiliar to many, a private correspondent aggregator is a fancy title for an entity that purchases mortgages and repackages the loans into mortgage-backed securities.
When we think of aggregators, often the first entities that come to mind are the GSEs, Fannie Mae and Freddie Mac. However, private aggregators play an equally important part in the facilitation of a balanced market by providing small banks and independent originators with the infrastructure to securitize loans. These private entities not only oversee the eligibility for originators to deliver loans to the Enterprises, but they also serve as a technical resource when it comes to best pricing, underwriting and securitization practices.
Private aggregators provide a wide range of services, including an extra layer of risk mitigation. This has created an advantageous situation for the GSEs. However, recent pricing policies on behalf of the GSEs have illuminated that this relationship may not be as mutually beneficial as it once seemed.
Historically, the Federal Housing Finance Agency (FHFA) has been committed to pricing parity, which has ensured a level playing field for all lenders. The idea that all originators are entitled to a non-varying of loan fees promotes competition in customer service, quality, and efficiency amongst lenders, which benefits the borrower. Despite pricing parity’s vital role in ensuring a competitive market, the GSEs have strayed from this by engaging in activities that exacerbate disparate pricing in the correspondent channels.
We see this disparity most clearly through the pricing advantage Fannie Mae and Freddie Mac cash windows hold over private aggregators. While private aggregators enhance loan quality by essentially vetting a loan through a number of risk analysis practices, all loans that are sent directly through these cash windows secure more advantageous pricing.
The bias in Fannie Mae and Freddie Mac cash windows is contradictory to FHFA’s principle of price equity and promotes a deviation from risk-based pricing. Additionally, this practice has made the cash windows vulnerable to adverse selection, as many of the loans purchased through these windows have already declined in value in large part due to their lack of being properly reviewed.
The incentive to funnel loans directly through the cash windows benefits the Enterprises at the expense of private aggregators and consumers. Rather than evaluate and price loans based on their performance and value, Fannie Mae and Freddie Mac are promoting a system that rewards loans based purely on which channel they travel through.
Moving forward, it is imperative that FHFA addresses this problem in order to safeguard the viability of an equitable mortgage industry. The GSEs should be required to create a comprehensive Seller quality and performance ranking system under the thorough guidance of FHFA.
Such a system would motivate originators to enhance their loan quality, while also ensuring standardized compliance with regulatory requirements. Also, it’s important to promote policies that support aggregators. In a low origination market, there is a need for a strong group of aggregators that will compete for small and mid-sized IMB originators’ loans.
A small or midsized IMB will need to sell a percentage of their loan servicing release to generate the funds needed cover the negative cash flow of originating a mortgage. So, policymakers and regulators should support aggregators’ ability to meet the liquidity needs of small to mid-sized IMBs by having a competitive bid for their loans. Aggregators can only provide competitive pricing if there are treated fairly by the GSEs.
In any ecosystem, a disruption in one area has the potential to adversely impact the entire food chain. While the allowance of disparate pricing between correspondent channels may seem like a small problem in the grand scheme of the mortgage origination process, this inequity in pricing harms the health of independent originators and borrowers by reducing competition and incentivizing a lack of risk-mitigation.
The mortgage industry boasts the impressive reputation of being a highly competitive market because of important regulation that ensures a level playing field. Let’s keep it that way.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
Ted Tozer is a non-resident fellow at the Urban Institute’s Housing Finance Policy Center (HFPC). He served as president of Ginnie Mae for seven years.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the authors of this story:
Dave Stevens at [email protected]
Ted Tozer at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]