Comments (12)

Jul 28, 2018

Fannie Mae is delegated underwriting, they don't have producer and underwriter
Sellers make more money bringing loans to Fannie Mae

Freddie Mac has producers and underwriters because they re-underwrite everything, and seller make less money bringing loans to Freddie

Fannie and Freddie business model is very different, Fannie Mae do loss sharing with sellers so they delegate everything to seller servicers, Freddie Mac don't have loss sharing agreement with sellers so they need their in-house producers and underwriters to make sure loan qualities are very good and sellable in agency CMBS market

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Jul 29, 2018

I was talking about this with my boss on Friday--was there ever a more redundant business than Fannie Mae and Freddie Mac? I basically started my career at Freddie Mac, and for the life of me I can't understand why these organizations continue to exist. If Fannie and Freddie evolved away in the next 5 years, there would be a gargantuan market demand for multifamily and sf residential mortgage debt.

I remember when I was at Freddie Mac as a wee 23-year-old. I turned to a co-worker--an employee of 25 or 30 years--and asked her why exactly Freddie Mac existed. She said that it existed to make homeownership more affordable by providing liquidity to the residential mortgage market, thereby lowering interest rates. I said something to the effect of, "Well, if interest rates were higher, wouldn't asset prices generally be lower? Wouldn't that kind of even things out over the long run?" She never responded to that critique.

With that epiphany--that the business model served no real purpose--it was then that I knew I could no longer work for Freddie Mac--I really just did not believe in its mission.

Jul 29, 2018

No private capital would provide 30 year fixed single family mortgage to the entire nation
Freddie and Fannie = American dream, they are never going away, they are like the Post Office, they exist because of their duty to serve.

On the multifamily side you could argue maybe GSE should exit the market, but on single family side GSE is absolutely crucial and they have 99% of the market share, it's basically the government subsidizing homeowners so people can afford their own home at younger age

Jul 29, 2018

The end of the S&L's really ramped up Fannie and Freddie. Local lenders were no longer servicing in house like they used to. The need for securitization grew rapidly. And like someone else said too, some banks flat out won't lend in certain communities. We have some really tough small desert towns in CA and I'm sure in the S&L era it was impossible to get a home loan there.

Jul 29, 2018
PacNumber:

The end of the S&L's really ramped up Fannie and Freddie. Local lenders were no longer servicing in house like they used to. The need for securitization grew rapidly. And like someone else said too, some banks flat out won't lend in certain communities. We have some really tough small desert towns in CA and I'm sure in the S&L era it was impossible to get a home loan there.

We don't need the GSEs for random lending in areas no one will lend to. We already have the USDA rural development loan program, which I believe is basically a credit enhancement. You don't need to socialize the entire mortgage industry for the benefit of a tiny few.

The reality is, the US banking industry is the most regulated industry on planet Earth + the entire mortgage industry has been socialized. And with all the regulation and socialization, we have almost an identical homeownership rate as we had 5 decades ago. There is no intellectual justification for this, if the argument is that it will boost homeownership.

Jul 29, 2018

the homeownership rate in 2016 actually dropped to the lowest level since the Census Bureau started tracking it in 1965. Only it 2017, it started creeping back up but compared to historical levels, its still low.

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Jul 29, 2018

GSE is doing exactly what they suppose to do, provide liquidity

There is no other solution right now because Wall Street ruined investors trust in financial system

Good luck finding any buyer for MBS bond that isn't backed by Fannie and Freddie, no one would buy them, because if it doesn't have GSE's guarantee then it's garbage, people learned their lessons in 08-09

Secondly, no one else does 30-yr fixed rate mortgage, it's not even about rural area, just go ask around and see if there is anyone, Wall Street or foreign money, who is willing to offer 30yr fixed. I can tell you the answer is none. Only idiots offer 30yr fixed and US government is the only one willing to be that idiot

Also on the multifamily side, there was no liquidity between CMBS 1.0 and 2.0, the whole capital market came to a halt in 2010-2012, only Fannie and Freddie were still active during 2010-2012 and provided tens of billions to the multifamily market.

Jul 29, 2018
thhddd:

GSE is doing exactly what they suppose to do, provide liquidity

Right, which boosts asset prices and makes housing prices more expensive. Kind of a contradiction to their mission.

thhddd:

There is no other solution right now because Wall Street ruined investors trust in financial system

Really? Because I sort of thought that both GSEs collapsed. At least that's what my laid-off Freddie Mac co-workers seemed to think.

thhddd:

Good luck finding any buyer for MBS bond that isn't backed by Fannie and Freddie, no one would buy them, because if it doesn't have GSE's guarantee then it's garbage, people learned their lessons in 08-09

Of course you would find buyers for MBS. You have buyers of Venezuelan debt even today. What you're really saying is, "Good luck finding people to buy MBS at razor thin spreads above the index." In a private market, interest rates might rise but that has a counter effect on asset prices. There is no free lunch--you can't artificially increase the availability of money without increasing the inflation of assets above their organic inflation.

thhddd:

Secondly, no one else does 30-yr fixed rate mortgage, it's not even about rural area, just go ask around and see if there is anyone, Wall Street or foreign money, who is willing to offer 30yr fixed. I can tell you the answer is none. Only idiots offer 30yr fixed and US government is the only one willing to be that idiot

Why do you need a 30-year mortgage? Canada doesn't do the mortgage business perfectly either (at least in my mind), but Canada's approach has produced higher homeownership rates and virtually no bank collapses in 80 years. Canadians typically have higher down payments, don't have 30-year mortgages (25 is usually the longest amortization) and their mortgages are typically adjustable after I believe 5 years or so, and they typically have pre-payment penalties (adjustable rates and prepayment penalties make securities more desirable to RMBS buyers). But why would we have 30-year term mortgages when the average homeowner sells or refinances in 7 years?

Let's be honest about what you're saying--you're saying that we would not have an organic private market for residential lending if we did things exactly as they are now. I agree with you 1000%, but why do we need to do things exactly the same as now? Why shouldn't a lender adjust rates every 5-7 years to reflect the market? Why should you be able to refinance without pre-payment penalty? Why should we fix a mortgage for 30 years when virtually no one keeps their loans for over 15? Why should we allow for nearly no downpayments? Down payment amount is a greater predictor of default than even credit score.

thhddd:

Also on the multifamily side, there was no liquidity between CMBS 1.0 and 2.0, the whole capital market came to a halt in 2010-2012, only Fannie and Freddie were still active during 2010-2012 and provided tens of billions to the multifamily market.

I'm not a multifamily CMBS expert, but of course you have a limited private CMBS market--rates are artificially low because the public sector is providing a subsidy. Why would the private market throw cash at a market where pricing doesn't reflect risk?

Jul 29, 2018
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