Change has come to Washington, and for some time our industry has been preparing for a new administration — which means a new approach, different personnel and a
For years this issue has been a priority for lenders around the country. On their behalf, the Mortgage Bankers Association has developed a model to end the conservatorship of the GSEs and establish a new, durable foundation for the secondary mortgage market.
The MBA presented this model in a whitepaper, GSE Reform Principles and Guardrails, which begins to address how to move forward with secondary mortgage market reform. The paper reflects the collective views of a diverse group of lenders — referred to as the task force — representing all business models from both the single-family and multifamily markets.
MBA's task force considered many models in developing its recommendation and built on recommendations previously suggested by past efforts. Several key features stood out as critical to ensuring the long-term health of the secondary mortgage market:
- Leveraging the benefits of competition and strong regulation;
- Ensuring equal market access for lenders of all sizes and business models;
- Preserving a strong public mission; and
- Maintaining a deep, liquid market for long-term, single- and multifamily financing options.
These are the bedrock principles on which a durable housing finance system should be built for future generations.
In order to properly reform the secondary mortgage market, we must recognize congressional action is required and embrace the critical role an explicit federal guarantee plays in housing. Learning from lessons that led to conservatorship of Fannie Mae and Freddie Mac, our proposal focuses on the core need for liquidity, stability and demand in the global markets for mortgage debt.
An implicit guarantee that leaves taxpayers holding the bag when things go sideways will no longer suffice. An explicit government guarantee is imperative but needs be carefully circumscribed — covering only the securities (and not the issuers) and invoked only after multiple, significant layers of private capital have been exhausted.
Therefore, in times of extreme duress, the federal government's role would be to ensure liquidity for continued investor purchases of mortgage-backed securities.
Only Congress can create an insurance fund to support an explicit government guarantee for eligible mortgage backed securities; any discussion of
So, what would an end-state resemble? In short, MBA supports an end-state that would encourage multiple guarantors, organized as privately owned utilities with a regulated rate of return and overseen by a strong, world-class regulator. They would have a public purpose of providing sustainable credit availability to the conventional mortgage market to lenders of all sizes and business models. Guarantors would also be responsible for executing on an affordable-housing strategy to ensure broad access to credit, preserve and develop affordable housing options, and address underserved markets nationwide.
These guarantors could be rechartered versions of Fannie Mae and Freddie Mac, as well as newly chartered competitors to acquire eligible single-family and multifamily mortgages and issue mortgage-backed securities wrapped with an explicit guarantee provided by the federal government. The explicit guarantee of the MBS would ensure the timely payment of principal and interest in the event one or more of the guarantors failed during a crisis and became unable to remit scheduled pass-through payments to investors.
In many critical ways, this end-state would build from the significant administrative progress already undertaken by the GSEs under FHFA's direction. For instance, the Common Securitization Platform and Single Security are key elements of our envisioned infrastructure. In addition, the GSEs' credit risk transfer programs would be expanded upon and form an important source of private capital. Also, the GSEs' multifamily businesses remain strong and have performed well in financing rental housing across the country. And finally, the expanded seller/servicer base that has been achieved through the FHFA's requirement for guarantee fee parity regardless lender size would be preserved to ensure competition. Security structures and operational processes around loan delivery, servicing and remittance would be preserved and maintained to ensure a smooth transition process and minimize switching costs to the new secondary mortgage market. The federal guarantee would be funded by insurance premiums paid by the chartered guarantors to a dedicated, actuarially sound Mortgage Insurance Fund. Each guarantor would be required to leverage private-capital investors to share credit risk above and beyond the loan-level credit enhancement provided by the primary market.
Transition to an end-state will not be easy and must minimize disruption. It must include several components necessary to ensure a smooth process. Namely, the existing operations of the GSEs could be reformed and repurposed to serve as initial guarantors. Regardless, the process must be well-thought-out and structured to help, not impede, the markets.
MBA will continue to work on its comprehensive plan, including a detailed end-state, transition steps and a strategy for ensuring affordable access to credit for underserved markets. The process will be completed by late April of this year.
A vibrant real estate market is a key component of a healthy and growing national economy. Our work is only beginning. The change brought on by a new administration and a new Congress is the perfect opportunity to solidify a safe, sound and sustainable secondary mortgage market. The time is now. Let' s seize the opportunity.
Rodrigo Lopez is the executive chairman of NorthMarq Capital and chairman of Mortgage Bankers Association.
