May 24: Letter on Common Securitization Solutions becoming a utility; Wells Fargo's economists on U.S. manufacturing; Vendor news
Helping the U.S. economy is a fine goal, but everyone wonders if paying someone in the United States $30 an hour to produce a widget is better for hundreds of millions of consumers than paying someone in another country $3 an hour for the same widget. Wells Fargo’s economics team objectively weighed in on the likelihood of the Trump tariffs positively impacting the U.S. economy. (See below.) Money matters. It’s an age-old story: you have the money, and someone else wants it. Since 2020, over 6,700 Indonesians have been tricked into jobs where they are forced to scam people on the internet, jobs that made elaborate promises on social media but amounted to being sequestered away somewhere in the lawless border regions of Myanmar, Cambodia, Laos and the Philippines and forced to coax Americans out of money. Fortified scam compounds are operated by Chinese criminal syndicates and earning about $40 billion in profits annually. Their workforce is coerced or often effectively kidnapped, and the Indonesian government has stepped up efforts to fight this kind of illegal recruiting.
Preventing the secondary markets from being roiled
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Jeremey Shiers, EVP & Mortgage President at Westgate Bank, brings up a good point linking the move toward privatizing Freddie and Fannie, the Common Securitization platform, and not spooking the secondar markets (resulting in higher rates). He and others are doing what they can to remind the industry that if we don’t deal with Common Securitization Solutions (CSS) properly, Sherman Act anti-trust issues and other problems arise, given that CSS is jointly owned by Fannie and Freddie.
“Should a change in conservatorship of Fannie Mae (FNMA) and Freddie Mac (FHLMC) occur without proper regard to CSS? No: The housing finance market could see massive operational disruptions. A solution for CSS will be offered in this letter, fortifying the resilience of the housing finance market with or without an exit from conservatorship, increase competition in housing finance, improve transparency in the governance of housing finance, encourage more private capital participation in housing finance, and modernize housing finance for current government guaranteed programs, all while reducing costs to the industry and lowering loan rates on American homeowners.
“Recall that CSS is jointly owned by FNMA and FHLMC, and its purpose is to serve as the backbone of the Residential Mortgage-Backed Securities (MBS) market that FNMA & FHLMC rely upon for normal operations. In February 2023, the Office of Inspector General (OIG) of the Federal Housing Finance Agency (FHFA) issued a white paper, attached herein, with a high-level overview of CSS’s operations and how integral of a part of FNMA and FHLMC’s operation CSS plays. With more than 70 percent of the MBS market under the custody of CSS, should FNMA and FHLMC be privatized, a risk exists that CSS could be classified as a monopoly over the MBS market, the second largest debt market in the US. Any attempted break up of CSS would result in significant disruption to the MBS market likely resulting in higher loan rates for American families buying homes.
“As a step toward a solution, the original vision for CSS should be realized and CSS should be a ‘Public Utility’ for the issuance and management of the MBS market. The debate, releasing FNMA and FHLMC from conservatorship has persisted for over a decade. There are many opinions on this release, but one common theme is present: The United States cannot afford for the housing finance market to be greatly disrupted. A thoughtful approach to CSS will prevent market disruption.
“Realizing the original vision for CSS as a ‘Public Utility’ eliminates the risks of an artificial break up due to monopolistic concerns. America has a long history of ‘Public Utility’ monopolies that work well for the people when appropriately regulated. This is the position this letter takes and calls for CSS to be owned as a public non-profit organization regulated by FHFA. CSS’s role as ultimate issuer and record keeper of the MBS market makes it a unique use case to serve in the role as the MBS ‘Public Utility.’
“In this role CSS will be able to create consistency of data across the broad MBS market, custodian changes to markets and information, make risks readily identifiable, add more market participants as originators and investors, all while reducing costs and overhead across the industry resulting in lower loan rates for American homeowners.
“CSS’s transition to a ‘Public Utility’ with or without an exit from conservatorship by FNMA and FHLMC ultimately makes the conservatorship debate simpler by having already addressed any issues of liquidity and market disruptions. Thought leaders on ‘GSE Reform’ debate implicit and explicit guarantees on the resulting MBS, this result will be important to the MBS market and will impact borrower rates, however with CSS having already been split from FNMA and FHLMC there would be no market operational risk regardless the outcome.
“As a ‘Public Utility’ CSS is in the best position to simplify and enhance the efficiency of the MBS market. Today Ginnie Mae (GNMA), as a department of HUD, operates a separate MBS issuance program that is significantly dated. GNMA would be able to migrate their MBS operations to CSS allowing GNMA to modernize their programs making GNMA issuance more fungible with FNMA and FHLMC. The ultimate outcome would be easier processes for GNMA, Lenders, and Investors resulting in enhanced liquidity for GNMA’s securities helping lower loan rates to American homebuyers.
“In the same way CSS can drive better results for GNMA with the proper authorizations CSS would be able to create MBS for the Federal Home Loan Bank (FHLB) system. This letter will focus on the program from Chicago, the Mortgage Partnership Finance (MPF) program.
“Currently, participating FHLBs hold mortgage loans originated by Participating Financial Institutions (PFIs) on their balance sheets. If allowed, CSS could work with FHLB Chicago to provide a path for MPF loans to become MBS, freeing up the FHLBs’ balance sheets and moving interest rate risk to the market from the FHLB system.
“The MPF program differs significantly from FNMA and FHLMC in how credit risk is managed. While all programs underwrite the loans substantially the same, FNMA and FHLMC charge Loan Level Price Adjustments (LLPAs) to offset credit risk. These LLPAs result in higher borrower rates since lenders must charge higher interest rates to make up for the LLPAs charged. The MPF program has no LLPAs. Instead, the PFIs provide a collateralized guarantee on the pool of loans sold to the FHLBs through the program.
“These PFI guarantees provide a significant layer of credit support to the FHLBs’ over and above the value of the houses financed and any mortgage insurance that may be required, see FDIC’s Affordable Mortgage Lending guide pg. 39 & 40 attached for more details. The result has been very limited losses to the FHLBs. With no LLPAs often the MPF program has similar or lower rates for homeowners in spite of the FHLBs having to use inferior funding mechanisms than securitization. Allowing the MPF program to be funded by securitization will create additional competition in the housing finance market lowering loan rates on American homeowners, increase competition, and ultimately reduce risks to FNMA and FHLMC.
“CSS as a ‘Public Utility’ also would have the opportunity to serve as the backbone for the return of private capital to the MBS market. Since the SEC adopted Regulation AB II there have been no publicly issued Private Label or non-agency MBS (PLS). The PLS market has received a large amount of blame for the housing meltdown post 2008.
“While a lot of this is warranted what didn’t exist prior to 2008 was a ‘Public Utility’ for the issuance of MBS and by extension PLS. With some adjustments to Reg AB II and CSS serving as the conduit, CSS, and FHFA as its regulator will be able to eliminate the non-credit related risks that plagued PLS in the era just before and after 2008. Additionally, by allowing CSS to work with organizations that are financially and operationally qualified to participate in the PLS market the non-agency mortgage origination market becomes more competitive. Today only a few firms can participate in the private placement (rule 144a) market and liquidity is limited therefore requiring higher rates. By returning to the publicly traded space, adding liquidity and additional qualified market participants the result will be lower loan rates on American homeowners thru increased competition and more efficient markets.
“In conclusion, CSS as a separate ‘Public Utility’ as part of the broader reforms of FNMA and FHLMC will increase competition, improve market liquidity, drive efficiency in the market, add more transparency to PLS, and bring a level playing field to market participants resulting in lower loan rates for American homeowners and reducing risks to housing finance overall.” (For comments or questions, contact Jeremey.)
Bolstering manufacturing in the U.S. will be an uphill battle
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Trump’s tariff whirlwind is viewed by some as a way of evening out a long-standing trade balance, punishing countries involved in the fentanyl trade, and helping U.S. jobs. Critics say that tariffs are outdated, ineffective, and pit the United States against the world.
Wells Fargo’s economics team weighed in.
“The goals of the administration's trade regime changes are varied, but a resurgence of American manufacturing jobs is certainly a priority. By raising the cost of imported goods, tariffs encourage the consumption and production of domestically produced goods. Could higher trade barriers spur a rebound in U.S. manufacturing employment?
“Interest in bolstering manufacturing employment is not new. The sector is associated with lifting droves of American workers into the middle-class following WWII, but employment in the industry peaked in 1979 at just under 20 million workers. Manufacturing employment totals 12.8 million today, or 6.7 million fewer jobs than its 1979 peak. The share of workers employed in the sector has subsequently shrunk to 8% from 22%. While payrolls are down from their 1970s heyday, anemic labor productivity growth in the manufacturing sector has underpinned a rise in employment recently. Today, there are 1.2 million more manufacturing jobs than there were in 2010.
“In the near term, an aim of tariffs is to spur a durable rebound in U.S. manufacturing employment. However, a meaningful increase in factory jobs does not appear likely in the foreseeable future, in our view. Higher prices and policy uncertainty may weigh on firms' ability and willingness to expand payrolls. As downstream industries face higher costs, they must decide whether to absorb them and accept lower margins, pass them onto customers via higher selling prices or a combination of the two. Neither avenue is supportive of employment growth.
“In the medium to long term, a meaningful increase in the share of factory jobs, while possible, would likely unfold over many years and come at high cost. U.S. labor costs are a hurdle. Labor cost differentials with the rest of the world require U.S. manufacturing firms to be highly capital intensive to compete in a global marketplace. Thus, an expansion in manufacturing employment would require significant capital investment.
“In order for manufacturing employment to return to its historic peak, we estimate at a minimum $2.9 trillion in net new capital investment is required. While sizable, we view this estimate as a lower-bound. The build out of new capacity would likely unfold over multiple years, with further increases in capital intensity and inflation requiring a higher amount. Assuming businesses are willing and able to invest such ample sums, questions over staffing remain. An already tight labor market for production workers coincides with slower labor force growth more broadly as lower fertility rates and, more recently, a reduction in immigration weighs on working-age population growth. Increased take up of manufacturing-specific training programs will go a long way toward filling existing vacancies, but these training programs must keep up with the evolving nature of manufacturing. New jobs will require different skills than those previously lost.
“Returning U.S. manufacturing employment to a level that remotely resembles its historical peak will be an uphill battle. Tariffs must be high enough to make the cost of domestic production competitive in the U.S. market, and they also must be kept in place long enough for producers to bring on additional workers and expand capacity. But uncertainty over the path of policy makes it difficult for firms to have the conviction needed to meaningfully increase investment solely on the recent changes to trade policy. If the economic or political costs are deemed too high, the current administration could quickly dial-back prevailing duties further. The current policy could also be reversed by the next administration.
“Even if current tariff policy sticks, a full rebound in manufacturing employment looks hard-pressed, in our view. The capital-intensive nature of U.S. manufacturing today suggests a minimum of about $3 trillion of new investment would be required. With productivity and inflation presumably strengthening in the coming years, and such lofty new investment likely to raise the cost of capital and construction, the price tag is likely to be even higher.”
Wells wrapped up with, “Assuming businesses are willing and able to invest such ample sums in U.S. manufacturing capacity, questions over staffing remain. The nation's aging demographics and tighter immigration policy pose a challenge for labor supply growth in coming years for all industries, including manufacturing. Tepid interest in factory jobs already poses recruiting challenges today as, like other advanced economies, the United States has shifted to a more service-based economy. As such, a meaningful increase in the share of factory jobs, while possible, would likely unfold over many years and come at high cost.”
Vendor morsels
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What lenders don’t rely on outside parties for their business? Let’s take a random look at who’s up to what.
Secure Insight CRO Amanda Padd and CEO Andrew Liput attended the recent NY Secondary Conference and reported that their conversations with several warehouse lenders covered wire fraud risk. Warehouse folks were surprised that many of their correspondents still do not have their own wire fraud and vendor management tools to address closing risk and instead rely on what the warehouse banks are doing. One head of warehouse lending remarked that, "outsourcing risk management at the closing to us is not what we expect from our partners. They need to have their own policies and tools in place." While a typical warehouse bank is most concerned about the safe delivery of a funding wire, mortgage lenders still have regulatory obligations to manage third party service provider risk and the various types of fraud loss that can impact their business, their reputation, and their borrowers.
Cloudvirga just announced an integration with the Encompass Docs Solution from ICE Mortgage Technology. The integration, among the first to leverage ICE's new API-based framework rather than its legacy SDK layer, expands the document provider options available to Cloudvirga's lender customers and enhances lender efficiency and compliance by streamlining the generation, delivery and management of initial loan estimates and closing disclosures. Here's the full press release.
In Argyle news, an integration gives lenders direct access to real-time, GSE-approved income and employment verifications (VOIE) within the Byte platform, improving loan quality and accelerating processing by 5–7 days per loan. The integration also brings substantial cost savings (up to 80% versus legacy providers) and enables Byte customers to re-verify at no additional cost. Full details here, in the press release.
LenderLogix, a leading provider of mortgage point-of-sale and automation software for banks, credit unions, independent mortgage banks, and brokers announced the release of the Homebuyer Intelligence Report, a quarterly summary of insights into borrower behavior during the home-buying process based on data collected by the LenderLogix suite of tools. The latest report covers data collected during the pre-approval and borrower application process in the first quarter (Q1) of 2025.
MISMO®, the real estate finance industry's standards organization, is seeking public comment on two work products to support the industry in the transition to the modernized credit report changes: Credit Reporting Modernization Implementation Guide and Credit Report Model Name reference document. The Credit Reporting Modernization Implementation Guide is a new resource that provides backward and forward compatibility guidance for the implementation of MISMO standards to support industry-wide credit reporting modernization. The 30-day public comment period for both work products runs through June 5, 2025.
Computer desktop clean up? Here’s a short video that reminds me of me.
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