MBA's Stevens Suggests Single TBA Market

Mortgage Bankers Association (MBA) President and CEO David H. Stevens, speaking at the Association's 2012 National Secondary Market Conference & Expo, pointed to the year just past and told his audience that things are looking better.  Both new and existing home inventories are down, sales are picking up, and shadow inventories are decreasing he said, and the economy is starting to see slow signs of recovery.  However, he said that the level of uncertainty the industry faces could have severe unintended consequences for consumers.

Stevens said, "It comes down to this, uncertainty and over correcting the mistakes of the past are the two greatest impediments to real estate market recovery and economic stability."

A major issue, he said, is the lack of private investment; the government sector is at capacity, representing more than 90% of the market.  We can't wait for Congress and the Administration to take action, to promote liquidity for investor purchases of mortgage-backed securities, especially in an election year.  There are things that can and should be done now that do not require legislative action.  Among these, he suggested, is to transition the GSEs to a fungible, pooled TBA eligible securities market.  In order to accomplish this, changes would need to be made with the Freddie Mac PC. With today's trading disparities between Freddie and Fannie's securities, the direct cost to competitively trade Freddie securities is by default being borne by taxpayers. Doing this now, while interest rates are low is of critical importance.

If the industry embraces a fungible MBS market, everyone involved will benefit. There will be more liquidity because the combination of Freddie Mac and Fannie Mae currency brings greater volume in any coupon. We all know that large, liquid pools create better trading value.  Taxpayers will be saved hundreds of millions of dollars because the execution will no longer be subsidized.  This is a necessary step to prepare the industry for the inevitable rise in interest rates.  Quite frankly, it doesn't just save money - it helps to transition the market to a new paradigm by providing a more flexible and efficient way of trading securities.

Stevens also pointed to the problem of uncertainty in the market which is reflected by borrowers who can't or won't buy a home because they are unsure about their jobs, afraid of buying when prices aren't stable or afraid they won't qualify for a loan.  Lenders are fearful of lending because they don't know how the rules might charge or if they might have to repurchase a loan because of a minor defect, and investors are skittish because they are worried about the collateral, don't know which way the market is headed, or what new policy may affect them.

The mortgage industry is grappling with an overwhelming number of government rules and while legislators and regulators have successfully eliminated the most risky features and products that created the housing bubble, "we are quickly approaching the tipping point where overcorrection is going to limit access and shut out the very people everyone is trying to protect."  

Lenders are afraid to make any loan on the margin so the only loans that will be made are to the wealthy, it will be too risky to take a chance on a first-time homebuyer who doesn't have a large down payment or spotless credit.  This restrictive lending will prevent a recovery.

Limiting access to credit has resulted in two phenomena.  First, investors and speculators are driving the low end market with all cash deals because FHA has become harder to get for the marginal buyer and second, the middle class's access to the market is shrinking

We cannot rely upon legislative corrections to fix these problems, he said.  Congress is at a stalemate; the Senate and House cannot agree and consensus is not guaranteed after the elections.  We do implore them not to raid the real estate finance piggy bank again as they did when the raised the GSE's guarantee fees to pay for the payroll tax cuts.  "This is a painful example of Congress not considering the consequences for homeowners and potential home buyers.  Congress actually taxed the very consumer they had intended to help." 

There are four key areas of uncertainty which are hold back credit, the Qualified Mortgage Rule (QRM), national servicing standards, repurchase demands, and ratings agency standards.  Clear rules in these key areas would provide a much needed level of certainty and allow the markets to continue to move in the right direction.