A key to improving the efficiency, accuracy, and transparency of the housing finance system is standardization according to Stephen Clinton, Freddie Mac's Senior Vice President of Conservatorship and Corporate Initiatives. Clinton, writing in Freddie Mac's Executive Perspectives Blog, addressed some of the challenges of being "present at the creation" of the Common Securitization Platform (CSP) proposed for the secondary market.
Freddie Mac and Fannie Mae (the GSEs) have already taken many steps toward standardization, Clinton said. Under the direction of its conservator and regulator the Federal Housing Finance Agency (FHFA) the GSEs have undertaken:
- The Uniform Mortgage Data Program designed to standardize mortgage delivery data, servicing data, securitization disclosures, and appraisal data;
- The Servicing Alignment Initiative which established consistent policies and processes for servicing delinquent loans owned or guaranteed by the GSEs; and
- Contract Harmonization which is making it more predictable, transparent, and efficient for the industry to do business with the GSEs.
The GSEs are now working on what Clinton called "the biggest shared step yet", the design and construction of the securitization platform that will replace their individual proprietary systems for securitizing mortgages and performing associated back office and administrative functions. The CSP will use a utility approach in an attempt to reduce costs, improve transparency, and lower barriers to entry for private market credit risk takers and benefit taxpayers, borrowers, and the broader housing finance system. This initiative has the potential to increase competition among credit guarantors which might not develop without it.
Standardization has its limits however and designers must make important choices about what is within the scope of the CSP and should be commoditized and what is outside and should remain in the realm of competition. If the platform is too narrow it won't create the efficiencies it should nor attract private capital. If it is too broad it may commoditize functions that should be allowed to create innovation and competition. "Given the unequal starting points of potential participants, this could stunt competition in the future"
As an example, Clinton pointed to issuance of securities as being a function most think belongs within CSP. Standardization there will reduce risk, support demand, and increase liquidity. In contrast, credit models, pricing, and customer relationships are generally thought to be prime sources of differentiation, innovation, and competition and should be left outside CSP.
These decisions will influence how the GSEs approach the platform today and how well it attracts private participants and if it lowers barriers to entry or unintentionally reinforces them. FHFA knows what they want to achieve with the CSP, Clinton said, and are consulting the GSEs in their areas of expertise. They understand, he said, "that while standardization is a good thing, even good things can be overdone."
Freddie Mac has been asked to do its part in developing the CSP in a way that makes no assumptions about the GSEs' future. "Our future is still to be determined," Clinton said, "but our experience and expertise is needed now by our regulator and our country."