What can we expect for the future of the secondary market in general and the government-sponsored enterprises (GSEs) in particular? To consider this, MortgageOrb visits with Scott B. Woll, mortgage consulting executive for Mortgage Banking Solutions of Austin, Texas, and former senior vice president and director of secondary marketing at Sterling Eagle Mortgage Investment Company in Trenton, N.J.
Q: What do you predict for the futures of Fannie Mae and Freddie Mac? Will they be privatized, or will they return to their GSE status (perhaps in a modified format)?
Woll: I believe – at this stage – that they will not be privatized. Instead, I believe they will be merged into one entity. Their initial creation was based on a need in the market for banks, thrifts and private mortgage companies, and their presence in some form is still needed. I believe the format will still be government guaranteed, insured and regulated. I am not sure how they will differ from HUD, but they will be a GSE without the ‘S.’
Q: Does having Fannie and Freddie in conservatorship help or hurt secondary marketing efforts?
Woll: It absolutely hurts the secondary market in the short term, with their limitations, including their requirement to dispose of most of their existing loan assets. They will become reduced buyers in the marketplace. Fannie and Freddie were handling the majority of conforming/conventional single-family and multi-family, so who will fill this void?
Q: What are you opinions on expanding a covered bond market in the U.S.? And can such a market offer a viable alternative to the GSEs?
Woll: I think these should be a strong alternative in the U.S. home financial market. These bonds are backed by a group of loans, but they remain on the originating entity's balance sheet and retain recourse. Therefore, the originating entity's strength and responsibility for their performance makes these securities credible and valuable.
The originating entity also has the ability to revise as needed in order to keep the value as high as possible. Additionally, with the backing of the entity, the rating is high and, therefore, pricing remains strong and liquid and offers competitive yields, so they should give the market an alternative for originators, lenders and investors.Â
Q: In your view, what will it take to reassure investors on the merits of mortgage-backed securities?
Woll: I believe that the market has seen the worst as to performance of many of the current MBS. If you believe that the worst of the delinquencies and foreclosures have been seen, then the performance of MBS should improve. That's assuming the economic environment does not get worse, and this does not include those securities made up of Alt-A, adjustable-rate mortgages (ARMs) and option-ARMs that still have room to fall. And as new originations, which will have current credits and current home values, their performance and, thereby, their values should hold and improve.
Home loans still have tremendous value in the marketplace and once we settle down and get back to that principal, the market will absolutely come back.
Q: If we were to return to this conversation one year from now, where do you feel the mortgage banking industry will be?
Woll: I honestly believe that when, not if, we revisit this conversation one year from now, that the mortgage banking industry will be back. Maybe not all the way back, and in a revised format from where we are today, but it will be back.
This industry is resilient, and its foundation of home value and a consistent ROI will return. It is based on confidence in the market, and I believe that will regained in less than a year. Nationally, we need a strong housing finance system, and investors will see the same thing, as will banks with capital to lend that will ensure them of a good return and strong collateral, compared to other options.
I have been in this market for over 25 years and plan on being here when it returns to prominence again.