Weinberg says political pressure on Fannie and Freddie is causing them to take too much risk
As the mortgage world continues to wait to see when the 21st Century ROAD to Housing Act will become law, additional ways to make housing more affordable and available continue to remain a hot topic.
Many have looked to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to help with the affordability push. In recent months, the GSEs have begun accepting VantageScore in an effort to provide credit opportunities to more borrowers.
However, some in the industry are wondering whether expanding available credit is bringing in additional risk. One lending executive believes both political parties are pushing Fannie Mae and Freddie Mac to take on more risk, and he’s growing concerned about the road this is heading down.
Glen Weinberg (pictured top), COO and partner of Fairview Commercial Lending, is worried that Fannie and Freddie may be taking on too much risk. He believes credit score shopping between FICO and VantageScore, increasing loan-to-value ratios, and reduced interest rate hedging are all in play.
"Both parties are going to be pushing Fannie and Freddie to take more risks to lower housing costs," Weinberg told Mortgage Professional America. "They're basically looking at Fannie and Freddie as a risk-free way to lower housing costs. Just make it easier for people to qualify — allow credit score shopping so you can use a VantageScore instead of FICO. You have a phone bill? Now you can go get a mortgage at 90% or 100% loan-to-value."
A predictable path
For Weinberg, the endpoint is not hard to read. He is skeptical that the government getting more involved in the mortgage business is going to end well.
"We know how this ends,” he said. “We saw it. The government is terrible at risk management. We can see that in anything the government touches. This is going to end with higher highs and lower lows when it hits the fan."
The problem, Weinberg believes, is that improving one side of the affordability equation will only cause issues on the other side. He said that for things to get better, either wages have to do a better job of keeping up and exceeding inflation, or home prices need to drop. Both of those have challenging side effects.
"If wages rise, you get inflation, so now you have higher mortgage rates,” Weinberg said. “If housing prices fall, you have possibly a recession. We're kind of screwed. There's no way to solve the crisis we're in without something bad happening."
Some possible solutions
As far as fixes to the current market conditions, Weinberg has some ideas, although he admits they all likely won’t happen due to the lack of political appetite to take them on. The first would be letting the markets know that a rate cut isn’t coming anytime soon. He also doesn’t like the risk that credit score shopping could add to the market.
“The first step I’d say is absolutely no rate cut anytime soon,” he said. “So relay that to the market. ‘Hey, we aren’t cutting rates anytime soon. The next step could be a rate increase.’’ So clearly and concisely convey that so that the market prices in correctly, and maybe the market with high rates will kind of help slow this down.
“The other thing I would do is there would be no way I would allow credit score shopping. That would be the first thing I’d eliminate because we’re just increasing the risk too much.”
One idea that has been brought up more recently is the idea of taking Fannie Mae and Freddie Mac out of conservatorship and making them independent. It was brought up by the Trump administration last year, but there has been little movement on it so far.
Weinberg believes it would force Fannie and Freddie to account for risk more closely, because they wouldn’t have the taxpayers to fall back on to bail them out. While he doesn’t believe the move would be popular, he believes it may be necessary.
"I would also spin off Fannie and Freddie,” he said. “They've got to be independent. They've got to be able to handle risk, and they've got to get away from the taxpayer model because it's not going to end well."
While he believes those ideas could help fix some of the issues in the housing industry, he doesn’t expect to win any popularity contests while implementing them.
“And none of this would be popular,” Weinberg said. “That’s why that would never get elected for office because nobody would be happy with any of those solutions. But if we’re looking at what is right for the market, what’s right for the country, what’s right for long-term housing, I think those are the steps I take. It could take three or four years. And no, there’s no political will to solve the problem.”
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