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Views continue to vary among private capital providers on housing finance reform

Providers of private capital to the residential mortgage market have had their hopes for federal housing finance reform dashed on multiple occasions over the past decade, but that did not keep at least one of them from speaking optimistically about prospects for regulatory and legislative action.

A series of second-quarter speeches by new Federal Housing Finance Agency Director Mark Calabria distinguished his priorities for the future role and construct of government-sponsored enterprises Fannie Mae and Freddie Mac from predecessor Melvin Watt. Then, a July 25 advance notice of proposed rulemaking signaled the U.S. Consumer Financial Protection Bureau's intent to allow the so-called qualified mortgage GSE patch to expire in January 2021, or shortly thereafter should a transition period be required. The patch essentially allows the GSEs to guarantee certain loans that otherwise would be considered nonqualified mortgages.

Redwood Trust Inc., a mortgage REIT that has been a consistent and vocal advocate of housing finance reform since the aftermath of the global financial crisis, praised Calabria in its most recent quarterly report without mentioning him by name for "regularly stating his determination to shift GSE market share to the private sector." The company characterized Calabria's stance on that topic as "a dramatic departure" and said he possesses "a number of tools" in his capacity as the regulator and conservator of the GSE to facilitate that shift.

The FHFA director, Redwood said, could alter GSE underwriting guidelines, discontinue GSE eligibility for certain loan products such as high-balance loans or second home financings, require the GSEs to sell more first-loss risk as part of their risk-transfer programs, or raise GSE guaranty fees to create "a more level playing field" with providers of private capital. The company further added that Calabria had suggested changes to GSE capital and regulatory regimes that would also help accomplish that goal.

Redwood also cited the CFPB proposal as reason for further encouragement.

"Taken together, these themes represent a clear direction of federal housing finance policy that is fully aligned with Redwood's business model and core strengths," the company said. Redwood added that it is actively engaged with key policymakers in Washington, D.C., to promote the cause of private capital in housing finance.

"We have noted many times that the range of potential housing reform outcomes for the market — and Redwood — is broad, but there remains opportunity for revolutionary change for our firm," Redwood said. "This is still the case, but the quality of discourse over the past several months leaves room for more optimism than we have had in quite some time."

Several peer companies shared in that positive outlook, at least to an extent. Executives at Ellington Financial Inc. highlighted the CFPB's proposal as a particularly positive step for its non-QM business, given their estimates that those kind of loans have "at times" accounted for more than 30% of Fannie Mae's and Freddie Mac's volumes.

"All signs point to a larger role for the private sector," President and CEO Laurence Penn said during an Aug. 6 conference call, but he cautioned that "a lot can happen between now and January 2021."

Michael Nierenberg, chairman, president and CEO of New Residential Investment Corp., said during a July 30 call that a hypothetical shift of business to the private market from the GSEs as a result of the CFPB's proposal would represent "a great opportunity" for his company from both origination and servicing perspectives. But he hedged his optimism, saying it would be "very hard to guestimate" how significant the opportunity would be until the rulemaking process plays out.

"Whether it happens or not, I really don't know," Nierenberg said. "I think all these things are very hard politically. I do think the current setup is working extremely well, particularly for the agencies, as they are able to shed credit risk and make money and provide lower rates for homeowners."

Redwood's renewed optimism about housing finance reform notwithstanding, Nierenberg and executives at Two Harbors Investment Corp. remain in wait-and-see mode.

"We think it is unlikely that anything of substance happens prior to the 2020 election," Two Harbors President and CEO Thomas Siering said during an Aug. 7 call.

"If the current administration stays in place, I do think there'll be very positive things that could come out of some of the potential new rules and regulations that will benefit our thesis around our operating businesses," Nierenberg said.