Calling the reform of the
government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac "the last
piece of unfinished business from the 2008 financial crisis" the Mortgage
Bankers Association today presented its proposal for the future of the housing
finance system. The paper, which MBA
says is the product of more than a year's work by a Task Force of individuals
from MBA member companies, suggests and end-state model that ca also fulfill an
affordable housing/duty to serve mission.
The group sets forth a lengthy list
of policy objectives which include:
the liquidity and stability of the primary and secondary mortgage markets, and
keeping the bright line between them.
the implied government guarantee of the GSEs with an explicit one at the
mortgage-backed security (MBS) level, backed by a premium-supported federal
taxpayers with front-and-back-end credit enhancements.
strong capital standards and regulatory powers.
a level playing field for lenders of all sizes and business models.
the GSE regulator to charter new entities (Guarantors) to create competition by
securitizing eligible single-and multi-family MBS.
where possible the existing infrastructure.
affordable-housing policy consistent with sound lending practices.
that a robust private market can operate parallel and be complementary to the
MBA says in many respects it has designed a system to
preserve what currently works. Lenders
would sell conforming loans into the secondary market by working with
Guarantors. They would also continue to
originate and securitize loans using other forms of guaranteed and non-guaranteed
options including FHA, VA, and conventional loans held on bank balance sheets
or securitized through private-label securities (PLS).
The process of selling conventional
conforming loans would be similar to the current process. The rechartered GSE's
and any new entrants would manage the credit risk on the pools and would issue
the MBS and place the government guarantee.
The Common Securitization Platform
(CSP) currently under development would issue a sole single-family MBS, most
likely structured the same as the already proposed Uniform MBS (UMBS) but with an
explicit guarantee. Investors will trade
single-family MBS through a TBA market similar to the one today. Multifamily loans sold to Guarantors would
utilize current executions such as Fannie Mae's DUS and Freddie Mac's K
programs and perhaps other structures to be developed by Guarantors. The CSP would operate as a self-funded
Guarantors would manage the credit risk on these
mortgage through underwriting, retained capital, and through front-end and
other risk sharing. Guarantor pricing
would be tightly regulated by the regulator just as GSE pricing today is
regulated by FHFA.
MBA believes there should be more
than the two initial regulators, i.e. the current GSEs. Legislation would authorize the regulator,
either the Federal Housing Finance Agency (FHFA) or a successor, to create
competition (or the threat of it) through a process that would allow other entities to
apply for and receive a charter under a process similar to that of applying for
a national bank charter. It could be
specific to a single family market, multi-family market, or both.
The regulator would be required to treat the system as
a utility and consider the impact of new competitors on existing ones, on the
relevant market, and on consumers. The
guarantors would be monoline, regulated utilities owned by private
shareholders, allowed to acquire single-family loans through both cash-window
and MBS executions and multi-family loans through existing financing and other
executions. MBA says the separation of
the primary and secondary markets has been an important element of what had
made the latter effective in providing liquidity and making mortgage credit
available nationwide. The new system
would preserve this "bright line" which is embedded in the GSEs' charters and
specifically prohibits them from originating loans
Guarantors could hold a limited
mortgage portfolio intended only for aggregation prior to MBS issuance, for
delinquent loan buyouts, loss mitigation and limited multifamily purposes. They would complete primarily on operations
and systems development, customer service, product innovation within set
guidelines, and pricing and execution.
There would be rigorous capital
requirements for Guarantors that could be met through a combination of their
own capital and proven means of credit risk transfer which Guarantors would be
encouraged to utilize. Lenders would
maintain their current role in obtaining credit enhancements - PMI, recourse,
existing multi-family risk-share mechanisms) while Guarantors would engage in
risk sharing through reinsurance, structured notes and other mechanisms. The regulator could reduce risk-sharing
levels during periods of market distress.
Guarantor-issued MBS would be
backed by the full faith and credit of the federal government and supported by
a federal mortgage insurance fund (MIF) built up over time by appropriately
priced premiums paid by the guarantors.
The MIF would cover catastrophic risk and would kick in only in the
event of Guarantor failure after all layers of private capital had been
Only if the MIF is exhausted would
taxpayers be at risk. Should a bailout be required, future Guarantors would
reimburse the Treasury and rebuild the MIF with higher insurance premiums.
The designated regulator would
provide prudential supervision, set capital levels, and monitor and regulate
target rates of return for the Guarantors designed to attract private
investors. It would ensure fair and
equitable access to the secondary market for all lenders without preferential
pricing based on value, and ensure continuance of the bright line.
The Task Force says the transition
to a new secondary market end state will be critical. It outlines a path which is designed to
minimize disruptions to the existing housing finance system and bring the new
system up to speed in a reasonable time.
Their suggestions for a transition period would be to:
the existing human capital and operational processes at both GSEs, supporting
their emergence as viable Guarantors
to the new system over a multiyear period to avoid disruption and build
barriers to entry for new Guarantors to encourage competition
FHFA and its existing legal authorities as a starting point, modifying the
structure as necessary to achieve the objectives.
MBA emphasizes that only Congress
can create this suggested secondary mortgage market. Its authority is required to change the
existing charters for Fannie Mae and Freddie Mac and create the necessary
guarantee for the mortgage-backed securities envisioned by MBA's proposal. It must also create the MIF to fund the
guarantee, empower FHFA or another entity to regulate and charter the new
Guarantors, and provide the legitimacy and public confidence necessary for
housing finance reform.
The proposal also sees the need for
a continuing mandate for providing affordable housing and sets out three
responsible, sustainable access to credit for prospective homeowners;
liquidity for the development and preservation of affordable rental housing
liquidity for currently underserved markets.
To achieve these goals MBA
recommends that the regulator periodically develop a comprehensive affordable
housing plan against which to hold the Guarantors accountable, establishing
both quantitative and qualitative affordable housing goals and assess an annual
affordable housing fee on new business purchases of the Guarantors.