The third of five planned concept papers outlining recommended steps to ease the transition during secondary market reform was published today by the Mortgage Bankers Association (MBA). The paper, A Secondary Market that Works for Smaller Lenders,outlines steps that must be addressed for smaller lenders to be able to utilize the secondary market.

PRICE CERTAINTY

MBA says that one major concern has been the pricing advantage and other preferences given to some lenders which have contributed significantly to the consolidation of the lending market in recent years. Although the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have claimed these disparities have narrowed, there is still a lack of transparency on pricing and underwriting concessions given to some lenders.

MBA says that the Federal Housing Finance Agency, conservator of the GSEs, should expedite efforts to eliminate these pricing and underwriting concessions and insure any GSE successors that operate with government guarantees should charge the same price for all sellers/issuers. Even pricing in the private sector should be more transparent than that from the GSEs and should be calibrated to objective measures of loan level and counterparty risk.

EXECUTION

Most proposals for the future of the federally backed secondary mortgage market do not envision the GSEs' successors as having a balance sheet to fund a cash window. The Ginnie II and the Fannie Majors programs which allow single loan execution are more complex than using the cash window and thus few small lenders utilize them. There is a need for the cash window to remain in place until an operable single loan execution process is up and running.

Next, the FHFA platform initiative needs to include plans for the acceptance of small lot deliveries into multi-lender pools. For example, although multi-lender securities might not price well in the capital markets, any discount could be reduced by pooling practices that increase their size. In addition it is important that some smaller lenders be able to securitize loans on a servicing-released basis. The GSEs currently have programs in place that facilitate bifurcation of reps and warrants for sellers and originators so that originators can deliver loans servicer-released but participation is tightly restricted. Such programs are essential going forward and should be made more broadly. MBA says it believes these programs do not need direct facilitation for any other player and that sellers should be able to negotiate reps and warrants directly with any approved servicer.

QUICK FUNDING

MBA says it is important for small originators to have an option for receiving quicker funding. Today the GSE cash windows provide daily funding and in any new system there should be consideration given to setting more frequent settlement dates. Broker dealerss already provide a bid for off settlement date trades using interpolated pricing. The expectation is that this market could grow if more sellers utilize it.

"MBA's concept papers all contain core components of any future state including transparency, a steady flow of mortgage capital and an explicit federal guarantee," Bill Cosgrove, CMB, MBA's Vice Chairman said. "This paper clearly and concisely lays out the key issues that community banks and independent mortgage banks like mine need to see addressed as we move towards the secondary mortgage market of the future."

The First concept paper released by MBA were Key Steps on the Road to GSE Reform, which suggests that the Federal Housing Finance Agency (FHFA) direct the GSEs to modify the Freddie Mac PC to mirror the exact structure of the Fannie Mae MBS so that these securities would be considered fungible for TBA delivery.   The second report was Up-Front Risk Sharing:  Ensuring Private Capital Delivers for Consumers in which MBA offers a solution to what is says is the government is crowding out private capital and blocking real competition; FHFA should o require the GSEs to offer risk sharing options to lenders at the "point of sale" rather than at the back end by enhancing loans that are already on the GSEs' balance sheets.