The looming debt ceiling crisis and the federal government shutdown have pushed aside pretty much every other issue in Washington today, but it won’t be too long before one of the major real estate issues facing the federal government will be back on the agenda, and that’s reform of the secondary mortgage market. Its importance can’t be overstated, because if the government stops backing conventional, conforming loans—these are the all-important loans backed by Fannie Mae and Freddie Mac–it’s unlikely we’ll have 30-year fixed-rate mortgages in the United States anymore.
That’s a dramatic thing to say, but it’s what the president of Ginnie Mae is saying. Ginnie Mae is the Fannie Mae-equivalent for loans that are backed by FHA, VA, and the Rural Housing Service, and Ted Tozer is its president. He sat down with NAR just before the federal shutdown almost three weeks ago and in that conversation, he made two key observations:
First, the guarantee that the federal government provides through Fannie and Freddie is absolutely essential for lenders to offer interest-rate locks on 30-year loans. Why? Lenders know they can lock in a loan at a set rate and find global buyers of those securities, because to these investors, federally backed securities are attractive interest-rate instruments. Depending on their needs, investors will buy pools of loans at certain interest rates because they don’t have to worry about credit risk. The federal guarantee covers that for them, so MBS purchases become pure interest-rate plays.
Second, the federal guarantee is also key to 30-year, fixed-rate financing, because, again, investors are looking for pools of loans at various interest rates because that’s what they’re managing: interest-rate risk. They’re not managing credit risk. As a result, investors are willing to buy and sell securities with long-term collateral because the federal guarantee makes them marketable assets no matter what interest rates do 10, 15, or 20 years down the road.
Tozer’s views are important because he is in the global market every day and if anybody has his finger on the pulse of global investment strategies, he does. For that reason, lawmakers, no matter their policy goals, would benefit from knowing his views on the importance of the federal guarantee to mortgage securities.
In key aspects, his views align with those of NAR, which has been calling for the federal government to maintain a presence in the secondary mortgage market.
So, once Congress turns its attention to Fannie Mae and Freddie Mac reform, the Ginnie Mae president has views that can help shed light on the debate.
In the video above, NAR Vice President Joe Ventrone talks with Tozer about the workings of the global mortgage-backed securities investment market.