Freddie Mac this morning reported its fourteenth quarter of positive earnings and the chief executive officer continues to believe the government-sponsored enterprise will move from strength to strength.
A new development, however, is that Donald Layton, who prefers to be called Don, said that Freddie Mac is prepared for any housing reform package that passes legislation.
While much is made of Corker-Warner, Johnson-Crapo and other attempts to finally return the GSEs to the private market, less attention is given to the disruption such lawmaking may have on the internal, day-to-day operations at the housing bohemoths.
In a conversation today, focused on the business operations at Freddie Mac, Layton said that Freddie Mac aligned operations so that “any legislative solution will be easier to implement.”
So that’s a vote of confidence for mortgage bond investors, and I have more.
Freddie Mac continues to push the taxpayer more into the catastrophic loss position, which means in the unlikely event of a bailout, the extent of aid necessary from the Treasury will be minimized. Fears of another rescue are generally understood to be overblown.
“The capital markets can absorb more,” Layton said, “so it’s a questions of how far that can go.” While Layton could not go into great specifics, he did add that Freddie Mac is looking at both TBA and “non-TBA” options.
One of the challenges though, remains the return of capital to the Treasury. “We work as if we have capital,” Layton explained. But, still, there is the balance of not having real capital to buffer against risk-product innovation. The model is to currently shed risk if it comes at a low cost to Freddie Mac and hold risk if unwinding it would be considered a high cost. This method is probably best evidenced with the following announcement from this morning's earnings:
"Freddie Mac reclassified certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale in the first quarter of 2015. This reclassification resulted in a benefit for credit losses, offset by lower other non-interest income and higher non-interest expense."
When asked in a follow-up question about alternative credit-score models, Layton said offering alternate credit solutions to the FHFA to consider is on the 2015 scorecard and he intends to complete the task by the end of the year.
It will then be up to the FHFA to determine if the new modeling systems are appropriate. In the past, Director Mel Watt has expressed dissatisfaction with the fact that “a ding on the credit” may prevent mortgage lending to otherwise credit-worthy borrowers.
Watt’s approval of 3% down payment options at the GSEs proves he wants to see the credit box open up, and requests for FICO alternatives appear to run parallel to that desire.