Nearly since the time Fannie Mae and Freddie Mac entered government conservatorship in 2008, some have called to release them back to the private market. At the same time though, there have been constant echoes that the GSEs need to remain countercyclical. Playing a countercyclical role in the private market is simply infeasible, according to Don Layton, a senior industry fellow at Harvard University’s Joint Center for Housing Studies. The former CEO of Freddie Mac called the notion that the GSEs could remain countercyclical post-conservatorship “quite wrong” and “fundamentally inconsistent” in a Joint Center blog post released Wednesday. In short, he explained that “if a source of mortgage credit has private sector capital supporting it, it cannot truly be countercyclical. … Only the government—as the owner of the money printing press—can ignore market conditions.” Without government backing, Fannie Mae and Freddie Mac will need to maintain substantive capital, just like other private financial firms, and they will need to adjust to market conditions—also just like other private financial entities. To remain countercyclical, the government would either need to exempt the GSEs from capital requirements or provide capital itself as it did in the last financial crisis, Layton explained, adding “But do we really want to go through that again?” “Perhaps it’s time to be realistic: countercyclicality is for FHA and VA, as direct government entities. Freddie Mac and Fannie Mae should be assumed neutral, at best, and more likely somewhat procyclical, just like the banks,” Layton stated. “So we have a conundrum,” Layton said. The GSEs’ charter requires them to be countercyclical, but and end to conservatorship necessitates they become pro-cyclical. Federal Housing Finance Agency (FHFA) Director Dr. Mark Calabria alluded to the delicate balance between maintaining appropriate levels of capital and risk while also fulfilling the statutory mission of keeping the market liquid when speaking before the National Association of Home Builders last month. Calabria called capital “the foundation of safety and soundness regulation” and explained that the FHFA is “looking closely at the risk profiles of Fannie and Freddie to ensure they match their capital levels and support their statutory missions.”The FHFA recently hired a financial advisor to help plan toward and end of GSE conservatorship. Prior to their conservatorship, the GSEs did play a largely countercyclical role in the housing market due to their Congressional charters and large government subsidies, Layton pointed out. However, in 2008, their ability to remain countercyclical with private sector capital came to an end.“After all, how could they not be procyclical when facing massive losses and rapidly deteriorating capital ratios?” Layton said. While the private-label securitization market, banks, and the GSEs must respond to economic cycles to remain viable, there are two entities that can and maintain a countercyclical role in the market: the Federal Housing Administration and the Veterans Administration. “Their funding is directly on the books of the government, their securitization guarantees carry the full faith and credit of the government, and they have no equity holders or stock price to worry about,” Layton said. Thus, while other entities retracted during the financial crisis, FHA and VA market share grew from about 5% to about 20%. 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The latest UK Finance figures reveal first time buyer mortgages were up 5.8 per cent, homemover mortgages were 1.4 per cent up while remortgages were down – both pound for pound (12.9% down) and with additional borrowing (7.1 per cent down).John Phillips, National Operations Director at Just Mortgages and Spicerhaart said, “Remortgaging (pound for pound) has fallen for the second month running, this time by 12.9%, which follows last month’s drop of 23.9 per cent. As I said last month, this is more to do with people being on longer-term fixed rates than any thing else, and this will continue for another three years or so until those five-year fixes from 2018 start to mature.Changing plansLast month, first-time buyer mortgages and home mover mortgages were down, and remortgaging with additional borrowing saw a rise. This month, that has shifted, and we can see that first-time buyer mortgages are up 5.8 per cent – which is more in keeping with the trend of the last 18 months, and homemover mortgages are also slightly up while remortgaging with additional borrowing are down.“It is really hard to work out any trends here – the only thing we can be certain of is that uncertainty is still impacting the market. Brexit is still up in the air, there is a possible general election on the cards and people are just feeling really uneasy about making big decisions which is why home movers are still quite subdued.“First-time buyers are still rising (apart from the blip in June) as people still need to get on to the housing ladder, but I think the message here is still the same – people are reluctant to move or borrow any more than they need to, so brokers need need to diversify and focus more on first time buyers, protection and other products rather than relying on remortgaging and homemover deals.”homemover mortgages remortgages Just Mortgages John Phillips mortgages Sheila Manchester Spicehaart UK Finance September 18, 2019The NegotiatorWhat’s your opinion? Cancel replyYou must be logged in to post a comment.Please note: This is a site for professional discussion. Comments will carry your full name and company.This site uses Akismet to reduce spam. Learn how your comment data is processed.Related articles BREAKING: Evictions paperwork must now include ‘breathing space’ scheme details30th April 2021 City dwellers most satisfied with where they live30th April 2021 Hong Kong remains most expensive city to rent with London in 4th place30th April 2021 Home » News » Housing Market » Mortgage lending: the only thing certain – is uncertainty previous nextHousing MarketMortgage lending: the only thing certain – is uncertaintyThe latest UK Finance figures reveal first-time buyer and home-mover mortgages were up, while remortgages were down.Sheila Manchester18th September 20190383 Views