In September 2008, the Federal Housing Finance Agency (FHFA) announced it was seizing the Federal National Mortgage Association (more commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac), two government-sponsored enterprises (GSEs) that finances much of the American housing market through the purchase of mortgages, which are pooled into the sale of mortgage-backed securities. In the run-up to the Housing Bubble-fueled economic crisis of 2008, Fannie Mae and Freddie Mac became illiquid, forcing the FHFA – in its role as the GSEs’ regulator – to put them under federal conservatorship.
The goal of the conservatorship was to enable the GSEs to reduce their respective losses and return to a state of self-management. But 15 years later, the GSEs remain under federal conservatorship. Multiple proposals to end the conservatorship have been proposed, but none could generate consensus to enable their enactment.
But for David Adamo, CEO of Stamford-based Luxury Mortgage Corp., the question of ending the GSEs’ conservatorship is moot.
“I don’t think the question should be whether or not Fannie and Freddie should be part of the federal system,” he said. “I think the answer to that question is a too complicated to answer and will take too long to unwind. I think probably the better question ought to be: How do we have a normal functioning mortgage market with Fannie and Freddie under conservatorship, and what percentage of the mortgages that are made in the United States should be run through Fannie and Freddie?”
Adamo’s focus is not merely an academic wonderment – Luxury Mortgage specializes in non-QM loans, or non-qualified mortgages, which are aimed at borrowers with financial profiles that don’t fall into the requirements of a typical mortgage due to inconsistent or nontraditional income structure, a major credit event or high debt. Because of the nature of these loans, they cannot be purchased by Fannie Mae or Freddie Mac for repackaging into the second market as mortgage-backed securities.
According to Adamo, an ideal mortgage banking environment would be one “where our industry and our economy is not as dependent upon Fannie and Freddie as we are today. We need a more functional secondary market for residential mortgages in United States. We can be fine having Fannie and Freddie under conservatorship in perpetuity, but just have Fannie and Freddie, the 45% on the United States, as opposed to as opposed to 85% to 90%.”
Adamo noted his company was among the first non-QM originators to offer discounted rates on non-QM loans in low-to-moderate (LMI) markets, which he viewed as a tool to try to bridge the homeowner gap that has grown between white and nonwhite communities. At a time when mortgage rates are elevated to levels not seen since the beginning of the 21st century, Adamo believed having discounted rates on non-QM loans could increase minority homeownership and make residential purchases more affordable.
“Because of the restrictive lending environment that we’re in, it’s still challenging for borrowers to qualify and then they have a higher interest rate environment for traditional Fannie or Freddie loans,” he said. “These non-QM products are proving very useful to provide financing to would-be homebuyers and existing homeowners that are unable to qualify for the standard guidelines. Making guidelines more accommodating and making mortgages available to borrowers that otherwise wouldn’t qualify through the traditional programs that are offered through Fannie and Freddie are some of the things that we’re doing to help advance homeownership and homeowner affordability.”
