Secondary Outlook: 3% Down Payment Loans Help GSEs Control Market

Mortgage & Real Estate









Government-related entities are expected to continue to largely control the secondary mortgage market 2015, but change may still come to the market in other ways.

Among other things, efforts by Fannie Mae and Freddie Mac to loosen standards for the loans they will buy are likely to continue moving forward — so long as concerns about liability don’t outweigh their potential benefit to increase origination volumes.

As 2015 approaches, efforts to reform the government-sponsored enterprises in ways that would diminish their dominance in the secondary market seem unlikely. However, market participants are encouraged by the Federal Housing Finance Agency’s recent move to ease loan repurchase requirements — which will likely result in a continued domination of the market by government agencies, accompanied by a slow expansion of credit.

“It just seems like an awfully vanilla world to me and I expect it to continue. What’s really the overarching story for next year? It has to be expansion of the credit box,” said Tom Millon, president and CEO of the Capital Markets Cooperative in Ponte Vedra Beach, Fla., who added the expansion will mostly likely occur first in the government-related market rather than the private one.

Interest on the part of Fannie and Freddie’s regulator as well as at the Federal Housing Administration to expand credit access has been a huge change for the market, and will likely continue into 2015, said Brian Koss, executive vice president of Danvers, Mass.-based Mortgage Network.

“Finally the pendulum has come to its farthest point and swinging back,” he said.

Although Fannie and Freddie’s regulator is making progress allaying lenders’ fears about increased liabilities with low down payment products, concern still exists broadly in the market, said Tom Wind, an executive vice president and the head of home lending at EverBank.

Lenders will need to continue balancing the need for more loans and the ability to serve more borrowers with the potential for more liability as they consider government-related entities expanded criteria, he said.

“We want to feel good about all of the products we’re bringing to the marketplace,” Wind said.

He expects private loan and mortgage securities trades will continue to show at least relative improvement in the coming year as it did in 2014.

“Jumbo certainly has seen investor interest as we’ve gone through the year, with continued demand both from end-investors who are looking to buy whole loans, as well as the investment banks that are looking to aggregate and do securities,” he said. “I don’t expect to see a huge lift, but more will come out with a little more liquidity.”

Jumbo mortgage securitizers, which aggregate pools of large loans above government entities’ limits to sell in securities, have had a tough time competing with banks that want to hold these loans in their portfolios. But Wind noted that as of late November, that pressure has begun to ease.

“The price differential between where the banks are and the secondary market has narrowed down, which has brought to the secondary market, creating a little more liquidity and I think positively building on itself,” he said.

Some private market loans will likely continue to be made outside the qualified mortgage definition’s safe harbor protection from ability-to-pay rule liability and sold into the secondary market, but prospects for this currently appear limited, said Wind.

“There will probably be some deals coming into the market and some securitization,” he said.

Interest in the non-QM market is considerable, said Millon.

“There are some fairly significant players trying to solve the non-QM question,” he said. “We will see expansion, but Fannie, Freddie and Ginnie will continue to crowd out the private sector.”

Another area where there is potential for continued but limited growth is servicing financing, said Millon.

“Servicing financing is more available than it was,” he said. “I don’t look for any real big increase in that, but we’ve seen a number of players enter into that market. While it’s not readily available, it is available.”

Mergers and acquisition activity also could continue to grow, Millon said.

“There still is a lot of capital interested in the mortgage space,” he said. “There is a lot of interest in positioning for whatever the future may bring.”

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