Recently Finalized Rules on Underwriting ‘Exotic’ Mortgage Programs may Benefit Fannie Mae & Freddie Mac
CHICAGO, Oct 23 (Reuters by Al Yoon) - Stricter oversight of lenders selling payment-option and interest-only mortgages will reduce Wall Street’s role in the business and allow Fannie Mae and Freddie Mac to focus on recouping lost ground, an industry panel said on Monday. Regulatory guidance on such “exotic” mortgages will crimp production of the loans that are used as collateral for so-called private-label mortgage-backed securities, Michael Marriott, a managing director at Credit Suisse, said on a Mortgage Bankers Association panel in Chicago.
“The regulatory guidelines are definitely going to dampen growth or reverse the growth” that private-label MBS have seen over the mortgage bond programs of Fannie Mae and Freddie Mac, Marriott told reporters.
Regulators including the Federal Reserve and the Office of the Comptroller of the Currency recently finalized rules for underwriting exotic loans, including qualifying borrowers at the highest payments they would have to make over the life of the loan.
Financial institutions from Countrywide Financial Corp. to Lehman Brothers Holdings Inc. protested the rules earlier this year, saying they would stifle the market for loans that make houses more affordable.
The surge in popularity of payment-option adjustable-rate mortgages, which allow the borrower to pay no principal and wrap a portion of monthly interest back into the balance of the loan, has helped steer the flow of new mortgages toward Wall Street securitizations since Fannie Mae and Freddie Mac did not have the ability or will to purchase them.
The market shift toward private-label issues from agency MBS will be interrupted only until Wall Street firms adapt, Marriott said. But the trend will see “some reversal” in the next 12 to 18 months, he added.
Accounting overhauls at the government-sponsored enterprises also distracted them from keeping up with the new products developed by lenders, said Michael Perry, chief executive officer at IndyMac Bank.
Fannie Mae and Freddie Mac “have been dealing with a lot of issues ancillary” to their mortgage businesses, Perry said on the panel, which also included Fannie Mae Chief Executive Donald Mudd and Freddie Mac CEO Richard Syron.
Syron said the tables may be turning based on the regulatory guidance. The mortgage bond market is also at risk because Wall Street capital has flooded the market and reduced the return on riskier securities.
“How the regulators approach (exotic mortgages) is going to be a major determinant of what the GSEs have” for share of the bond market, he said.
Still, the GSEs will not regain the same degree of dominance they once enjoyed, said Fannie Mae’s Mudd.
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