Hensarling is chairman of the House Financial Services Committee, which means any Fannie Mae/Freddie Mac reform bill must first go through his panel, whether he’s the author or not.
Most experts agree that passing housing-finance reform legislation in 2018 now looks improbable, leaving the immediate future of Fannie Mae and Freddie Mac in the hands of the Treasury Department and the Federal Housing Finance Agency. Researchers at the Urban Institute say that if legislation remains stalled, the two GSEs could be placed into receivership and reconstituted. Laurie Goodman, director of UI’s Housing Finance Policy Center, said Fannie and Freddie could be wound down within five years, under the Housing and Economic Recovery Act, and be replaced by new entities with no government backstop. She noted that this scenario would leave the fate of government support for the GSEs’ legacy mortgage-backed securities unclear.
Freddie Mac this week rolled out a pilot program that aims to lay off credit risk on mortgages it buys to a group of offshore insurance firms, using Arch Capital Group as a conduit and manager. Initially, 12 lenders will be part of the program, including Freedom Mortgage, the nation’s fifth largest originator overall. Arch is the parent company of the nation’s largest private mortgage insurer. Industry sources told Inside The GSEs that Fannie Mae is working on a similar pilot, but details were sketchy. A Fannie spokesman would only say, “It’s a bit premature to comment.” And a source close to the matter added that Fannie is “always looking for innovative ways” to reduce risk.
Possible changes suggested for Fannie Mae and Freddie Mac could lead to borrowers paying an extra $400 a month in mortgage payments, according to a new analysis from Zillow. If the 30-year fixed-rate mortgage were to be done away with, Zillow said future mortgage borrowers would get loans with shorter terms and higher interest rates. For example, without the popular 30-year fixed-rate mortgage, the typical buyer would pay an additional $390 each month on the median-priced home for a 15-year fixed-rate mortgage. Moreover, the conforming market would move closer to the jumbo sector. Zillow noted that a 30-year non-conforming loan would cost borrowers about $20 more per month than they now pay.
A battle is brewing over whether Fannie Mae and Freddie Mac should allow lenders to use alternatives to the ubiquitous FICO credit score. Some industry participants argue that the current credit scoring system works well. Others complain that the Federal Housing Finance Agency and the GSEs should be doing more to encourage alternatives to a system some deem outdated. The FHFA has been evaluating alternative credit scoring models over the past year and charged the GSEs with closely examining potential changes in how they use credit scores. Right now Fannie and Freddie rely exclusively on the Classic FICO score.
Both GSEs have now paid the government the 10 percent compound rate of return required by the original senior preferred stock agreement, according to the R Street Institute. The think tank’s senior fellow, Alex Pollock, said it’s time to put the senior preferred stock purchase agreement to rest. Fannie just recently joined Freddie in this “10 percent moment.” He said because Treasury has received dividend payments from both Fannie and Freddie that equal the economic equivalent of repayment of the entire principal of their senior preferred stock, plus a full 10 percent yield, “it is now entirely reasonable for it to consider declaring the senior preferred stock retired.”
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