Last week, the Mortgage Bankers Association (MBA) released a white paper titled: GSE Reform: Creating a Sustainable, More Vibrant, Secondary Mortgage Market, which laid out the association’s vision for a reformed and revitalized Fannie Mae, Freddie Mac and secondary mortgage market.
As the MBA and many members of Congress see things, the structure of the government-backed housing market, specifically Fannie and Freddie, places too much reliance on government support.
Economists attribute the Great Recession to the housing market and, more specifically, to the fact that the government was such a large backer of the mortgages (via mortgage-backed securities and CDO’s) that derailed the U.S. economy and triggered a worldwide recession. In response to this market failure, the MBA is trying to take the lead in crafting and implementing reform while they see a window of opportunity to make lasting and beneficial change. But it must be noted that the MBA can only lay out their vision and try to lobby and push this vision – they will ultimately need Congress to vote, pass and implement the structure, which may never occur, or may dramatically deviate from the vision they are championing.
“Key leaders on Capitol Hill and in the new administration have made it clear that GSE reform should be accomplished through bipartisan legislation,” David Stevens, CEO of the MBA has said. “While progress has been made during conservatorship, only Congress has the power to ensure lasting reform.”
In the white paper, the MBA lays out its approach to GSE reform. They argue that their reforms will inject higher levels of risk-bearing private capital into the mortgage system. At the same time, they assert that their vision will reduce the mortgage system’s reliance on the government. Paired together, the higher levels of private capital and lower levels of government involvement will enhance the stability of the mortgage system, adding multiple new parties (guarantors) that will be regulated by the government in the same way a utility is regulated.
The MBA argues this vision will balance interests of loan consumers (borrowers), those that make real estate loans (lenders) and the shareholders of the guarantors (markets).
Taxpayers and consumers, who ended up on the hook for the bail out of the system early in the decade, will be protected by clear market conduct rules, requirements, and a new, yet to be created (or funded), Mortgage Insurance Fund which will be federally-backed. The new MIF will back the mortgage-backed securities markets, not the guarantors themselves. It will be funded through insurance premiums. (This structure, in my opinion, will be the hardest thing to “sell” to Congress based on the current administration and the perceived lack of willingness to expand government size, regulation or oversight.)
Borrowers, the MBA argues, will benefit from competition and execution in what amounts to a modified free market approach. Lenders will have a level playing field – which should open up competition to lenders of all sizes – offering an entry to the markets to new, upstart firms. All lenders will have known rules for originations. Competition will, in theory, separate lenders based on internal structures, technology, customer service and innovation. The end result for borrowers? Better pricing and loan execution.
Importantly, the MBA paper lays out a solution that will apply to BOTH the residential and multifamily markets. A transitional period has been factored into the plan to allow for acceptance and minimize any perceived or actual market disruption.
The current white paper is a follow up to GSE Reform: Principles and Guardrails, which was released earlier this year. Both were offered up by the MBA’s Task Force for a Future Secondary Mortgage Market, made up of MBA member companies from the residential and multifamily real estate finance industries.
With this vision, the MBA intends to work with Congress and the Administration to find a permanent, risk-reduced, sustainable solution to the government’s role in housing finance that avoids the mistakes that led to the crisis.