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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2018

Be Prepared for the GSE Road Ahead

Fannie and Freddie are evolving, and your business plans should reflect that reality

The federal tax overhaul passed late last year lowered the value of some tax-deferred assets on the books of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. That, along with other factors affecting the mortgage industry, prompted the two GSEs — which have been in a government-supervised conservatorship since 2008 — to draw money from the U.S. Treasury in the final quarter of 2017, the first such draw in years.

The GSEs experienced a combined comprehensive loss of some $10 billion in fourth-quarter 2017, far exceeding the $3 billion capital buffer set up for each of the GSEs. As such, Fannie Mae and Freddie Mac had to draw a total of $4 billion from the Treasury to offset the losses. The GSEs rebounded in the first quarter of this year, but the prospect of potential future losses and Treasury draws is a constant refrain and reminder of the precarious position of the GSEs, which are a major engine of the housing industry.

Consequently, GSE reform continues to be a topic of hot debate within the mortgage industry. A number of proposals for reform have been advanced by a variety of interests, although none have yet gained enough traction among policymakers to result in any definitive action. It seems GSE reform may still be a ways off as more pressing industry issues take precedence — for example, regulatory relief.

Still, the GSE reform push is a debate that mortgage professionals should follow closely. In addition, as part of that process, they also must work to ensure their loan origination systems and other software are updated and on the cutting edge, and able to quickly incorporate any major changes or reforms affecting the GSEs, given the impact the GSEs have on daily business operations and the mortgage industry overall.

Staying power

It’s no secret that GSE reform has been a divisive issue among policymakers, depending on their constituency and market philosophies. Just as there is among policymakers, disagreement among mortgage industry professionals when it comes to GSE reform exists as well.

Many lenders continue to sell and service GSE loans, however, attesting to their continued support of the GSEs’ work. Last year, for example, as a sign of their recognition of the importance of the GSEs, a group of small lenders, in conjunction with some well-known affordable-housing groups, released a GSE-reform proposal that advocated changes many community lenders hope to see shape the future GSE landscape.

Some of the suggested reforms included rebuilding the capital buffers for Fannie Mae and Freddie Mac, maintaining the Federal Housing Finance Administration (FHFA) as an independent regulator of the GSEs, providing fair access for lenders of all sizes and ending the GSEs’ conservatorship status. In short, while lenders and other industry experts have advanced a range of GSE reform proposals, there seems to be some consensus in the mortgage industry that the GSEs should not be gutted or eliminated altogether.

Substantial benefits

Freddie Mac and Fannie Mae were originally established to provide lenders with more liquidity for lending. One of the major goals of the GSEs was to help expand the U.S. homeownership rate.

Along with fulfilling the homeownership objective, Fannie Mae and Freddie Mac also have implemented many positive changes for mortgage professionals through the adoption of technology. This has helped to improve the efficiency and quality of both the origination and servicing processes.

The GSEs implemented the Uniform Closing Dataset (UCD), for example, providing the industry with a common set of data standards that facilitated the electronic communication of closing disclosures and the transmission of information between integrated software platforms — which helps lenders operate more efficiently and achieve better loan quality. Additionally, many lenders rely heavily on Fannie Mae’s Desktop Underwriter (DU) and Freddie Mac’s Loan Product Advisor. These automated underwriting systems have helped to improve collateral and data quality and also allow lenders to provide greater flexibility and options to borrowers.

To effectively cope with an evolving regulatory environment,
including future GSE reforms, mortgage professionals should look for loan software that is consistently updated.

On a related front, Freddie Mac and Fannie Mae have established underwriting standards that have helped mortgage professionals for years by improving the underwriting process and facilitating quality loans and the successful sale of those loans once closed. Even if lenders ultimately decide to sell their loans to a private investor, the underwriting guidelines and lending policies established by the GSEs still carry great weight.

The Ginnie difference

While also a GSE, Ginnie Mae differs from the quasi-government corporations Fannie Mae and Freddie Mac in a few key ways. Unlike Fannie and Freddie, which are the definition of the conventional-loan market, Ginnie Mae is a federally owned corporation that is part of the U.S. Department of Housing and Urban Development, and it deals with nonconventional loan products — such as home mortgages issued through the U.S. Department of Veterans Affairs, the Federal Housing Administration and the U.S. Department of Agriculture.

One of the most notable differences between Ginnie Mae and the other two GSEs is that Ginnie Mae does not buy or sell loans. Instead, Ginnie Mae guarantees investors the timely payment of principal and interest on mortgage-backed securities (MBS) underpinned by federally guaranteed loans. Ginnie Mae’s portfolio of outstanding MBS guarantees involves some 10.7 million loans, according to the GSE’s 2017 report to Congress.

Ginnie Mae securities also are backed by the full faith and credit of the United States government. Fannie and Freddie’s MBS issuances do not have that explicit backing. Unlike Fannie Mae and Freddie Mac, Ginnie Mae has never needed a government bailout. Ginnie Mae, through its guarantees, helped to fund 1.4 million single-family home purchases in fiscal year 2017, according to its report to Congress, attesting to its great benefit to the mortgage industry.

Preparing for change

Mortgage lenders continue supporting the GSEs by selling and servicing GSE loans. GSE standards and regulations, however, are constantly shifting, requiring industry professionals to be flexible in their operations. Many mortgage lenders are concerned about staying on top of the constantly changing regulatory requirements.

Lenders and other mortgage professionals working with loans originated under GSE underwriting rules can rest easier knowing they have mortgage origination and servicing software as an ally. Effective mortgage software enables lenders to better adapt their current operations to deal with changes prompted by regulatory shifts while also minimizing costs and inefficiencies.

To effectively cope with an evolving regulatory environment, including future GSE reforms, lenders and other mortgage professionals should look for loan software that is consistently updated to keep up with those changes. These software updates should be in process well in advance of the cutover date for any GSE changes. That gives sufficient time for users to become accustomed to the impact of the changes and to meet them head on the moment they take effect.

Mortgage originators also should choose a loan origination system (LOS) that supports integration of the multiple technologies used during the mortgage-approval process. The Mortgage Industry Standard Maintenance Organization (MISMO) provides data standards to facilitate the exchange of information between technology systems. MISMO interfaces also allow mortgage professionals to select from a wide range of compatible service providers. Integration enables platforms to “talk” to each other through the automatic transmission of data, promoting higher loan quality and airtight compliance as manual intervention is greatly reduced.

Finally, lenders should select an LOS that also includes robust compliance programs and interfaces, along with ancillary tools to bolster compliance. The ability to add user-defined fields, generate custom documents and reports, or to define business and compliance rules, for example, will help lenders and other mortgage professionals comply with regulatory requirements more easily and efficiently.

•  •  •

The GSEs provide liquidity to lenders, who would have a more difficult time financing housing for borrowers without that assistance. Although the GSEs have implemented many changes in the past, and further reforms are on the horizon, collaboration between Fannie Mae and Freddie Mac also is advancing, including the creation of a common securitization platform, which will provide even greater liquidity to the mortgage finance industry going forward. By choosing loan origination and servicing software wisely, mortgage professionals can work effectively with the GSEs, wherever they are headed in the future. 


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