Don Layton, former CEO of Freddie Mac recently wrote what can only be described as an attack on mortgage originators from his seat as a JCHS member, Harvard Joint Center for Housing Studies. But what Mr. Layton has done is simple: perpetuate his continued disdain for participants in US mortgage manufacturing and, in doing so, made inaccurate assumptions about causation.

The article is titled “The Policy Implications of Record Mortgage Origination Profits During the Pandemic.” He describes mortgage originators as “intermediaries” in the transaction between a consumer and the secondary market. His thesis seems to be based on his long-standing belief that GSEs and ginnie mae programs are all that matters to create access to mortgage financing and that lenders are, essentially, greedy institutions that have leveraged Federal Reserve actions during the pandemic to maximize profits instead of passing on the full value of consumer rate reductions. His disdain for mortgage originators comes through clearly in his words, but distorts his sensibility in his published article.

A little history

First, let’s be clear. It is true that margins have widened enormously as a result of the actions of the Federal Reserve. At the height of the pandemic, 30-year mortgage rates fell, bottoming out at around 2.25% for a well-qualified borrower. Volumes soared and overwhelmed an unprepared mortgage finance system that months earlier in 2019 thought it might be heading for higher rates and slower volumes.

In fact, if you look at the period just before the Fed’s response to COVID-19, refinancing volume was much lower, then suddenly increased by more than 250% on a yearly basis. Both lenders and GSEs have borne the brunt of this impact.

At the start of April 2020, interest rate movements were so rapid that many feared that the originators covered by the pipelines could cause institutional failures following margin calls. I would note that this liquidity problem could have been alleviated by actions of the GSEs themselves, including the very company of which Mr. Layton was once CEO. But they didn’t, and lenders were soon forced to dip into their cash to support those margin calls, something policymakers remain very concerned about going forward.

This increase in volume has left mortgage originators with limited options to manage consumer demand. Since denying requests to slow the volume to a manageable level would have drawn protests from housing activists and more and would also be considered illegal, they had to turn to the only two options available.

First, mortgage lenders tried to hire as quickly as possible. The total capacity of the US mortgage market before COVID-19 would allow for a volume of $1.5 to $2 trillion. With the Fed’s extraordinary intervention cycle, called Quantitative Easing (QE), market volume doubled. 2020 and 2021 were back-to-back the two biggest mortgage origination years in US history. 2003 being the only previous year to approach this level.

A zero-sum game

Hiring enough qualified staff to handle the volume was a challenge. As all the lenders were trying to hire, it became a zero-sum game that eventually forced lenders to hire and train unskilled workers to become processors, closers, underwriters, quality control personnel, etc. It was an impossibility to accomplish quickly amid the rapid onslaught of volume.

The only other option to slow volume – pricing

So the only other option lenders had was to try to slow down the volume in some other way. And the only remaining valve they could turn to was pricing. So, in the midst of the pandemic recession, with historic levels of mortgage production and capacity limitations, lenders have begun raising rates or slowing down the full recognition of declines in order to maintain service levels and expectations. remote customers.

Mr. Layton argues that these “middlemen” – the mortgage originators – somehow intentionally profited from the actions of the Fed to generate excess profits. While it is true that margins have widened as prices have been used to maintain volume levels, anyone in the mortgage industry knows that this industry lacks the ability to come together in a joint effort to produce better yields.

If one wants proof of this, one need only look at the inability to control mortgage mounting pay scales. The mortgage industry is notoriously uncoordinated when it comes to market management. This is usually an advantage in a normal market, as the competition between the multitude of mortgage bankers and mortgage brokers will usually drive rates down to the lowest common denominator, often driving margins to near break-even levels.

Clear distaste for mortgage originators

What is perhaps most concerning about this treatise by Layton is its “middle-man” language and obvious contempt for mortgage originators, almost seeming to portray them as a hindrance to a critical access channel. . Mr. Layton seems unaware that as CEO of Freddie Mache and his successors had every opportunity to ease the process burden on lenders, which could have reduced some of the operational inefficiencies that established these timelines for mortgage processing.

Most importantly, I think Mr. Layton missed the critical element. Far from being “intermediaries”, without mortgage originators, the products of Freddie Mac, Fannie Maeand the Ginnie Mae programs would be nothing more than a dusty set of books on shelves.

Freddie Mac benefits greatly from three things

The reality is that the business he once ran – albeit critical – benefits greatly from three things. First, GSEs do not bear the overhead and administrative burden of having to manage the mortgage origination infrastructure of the US mortgage market, thus allowing them to operate with only a few thousand employees.

Second, the GSEs are members of an exclusive club with only two members which consist of Fannie and Freddie. Legislation currently prohibits any new entrants to the model, essentially eliminating any real competition.

Third, all GSE debt is guaranteed by the US government. The triple-A status on agency MBS that results from this guarantee ensures that agency (and GNMA) securities will trade ahead of almost any other in a global marketplace, providing GSEs with a level of market advantage that does not exist in any similar form on earth.

The crushing sequel

One final point, just as mortgage lenders have seen wider margins in these historic consecutive $4 trillion years, the industry is now facing the crushing consequences of this with a market facing declining about $1.5 trillion in 2022.

Layoffs, margin squeeze, mergers and acquisitions, etc. begin. When this cycle is over, the scope of the industry will be very different from what it is today. Freddie and Fannie; However, they will look relatively alike, as they are not in competition and do not have to deal with all the expenses of making the mortgage. Mr. Layton’s former company may benefit from aloof monitoring, concerned only with some counterparty risk that may come from some weakened companies.

Oh yeah, by the way, Mr. Layton defends the 50 basis point refi fee as justified due to the pandemic, and the ones that were scrapped after realizing the impact would be less. This is a complete distortion of the facts. Director Calabria imposed fees on refinances simply because he also knew he could expand GSE’s margins in this high demand cycle. It had nothing to do with risk.

In fact, refinancing reduces the risk of a mortgage loan portfolio. The fee was only removed after the end of Calabria’s mandate. New director Sandra Thompson has eliminated fees.

A little knowledge is a dangerous thing

My father always taught me, “a little knowledge is a dangerous thing.” His love for Shakespeare shines through, but a lesson for Mr Layton, who during his tenure at Freddie Mac openly showed contempt for mortgage insurance companies and now mortgage originators while failing to realize the privilege that his company held and holds in the market.

Its assumptions about margin changes amid market cycles; however, is of greater concern as this seat he holds at JCHS may influence others who seek to take a bite out of an essential part of the mortgage finance system. And for this reason, it is important to speak openly against his point of view.

David Stevens has held a variety of positions in home finance, including as Senior Vice President of Single Family Homes at Freddie Mac, Executive Vice President of Wells Fargo Home Mortgage, Assistant Secretary of Housing and Commissioner of the FHA, and CEO of the Mortgage Bankers Association.

This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.

To contact the author of this story:
Dave Stevens at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]