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MBA makes case for front-end risk-sharing

The nation's largest mortgage trade organization, the Mortgage Bankers Association (MBA), made the case this week for incorporating more upfront risk-sharing with the private sector on the most popular loan types, including trying models that small lenders fear could give big banks an advantage.

The MBA sent a letter to the regulator of Fannie Mae and Freddie Mac indicating that it favors a system that employs a broad range of tools to share risk on loans purchased by the government-sponsored enterprises (GSEs). Fannie and Freddie are now required to transfer the lion’s share of the default risk on new loans.

PMI(1)MBA supports expanding the use of front-end risk-sharing, through which a portion of the mortgage is “de-risked” at the time or before Fannie and Freddie purchase the loan. The risk-sharing approach can include applying deeper-coverage mortgage insurance at the loan level, or structures where the lender retains a portion of the risk of the loans. 

"MBA has for decades advocated for a bright line between primary and secondary markets," MBA’s President David Stevens wrote in the letter to the Federal Housing Finance Agency (FHFA). "One aspect of this bright line is that primary market lenders select front-end credit enhancements, while the GSEs structure back-end credit enhancements."

The trade group emphasized that any form of sharing risk should be transparent and accessible to lenders of all sizes, and should take into account the impact on borrowers. MBA made several recommendations to ensure that small lenders aren't put at a competitive disadvantage in pricing their loans as a consequence of front-end risk-sharing.   

The trade group also favors Fannie Mae and Freddie Mac continuing its programs of back-end risk-sharing, through which the GSEs confer some of the risk to investors through the sale of securities. MBA officials noted, however, that there are downsides to these back-end risk-sharing deals, including the fact that the GSEs have to warehouse the risk for several months before they can complete the risk-transfer offerings. To date, Fannie and Freddie have transferred the vast majority of the risk through back-end deals.

FHFA recently requested industry input on front-end risk sharing, but the issue has been contentious.

In a letter to the FHFA on Thursday, the American Bankers Association expressed concerns that introducing front-end models, like expanding private insurance, could add costs for borrowers and another layer of complexity to making mortgage loans. ABA said it was appropriate to test new risk-sharing models, but cautioned against disrupting the progress that Fannie and Freddie have made in developing back-end structures.  

"One of the clear benefits of back-end credit-risk transfers is that it has no impact on loan origination, as the credit-risk transfer happens after the sale of the loan to the GSEs," ABA Senior Vice President Joseph Pigg wrote. "Front-end credit-risk transfers may not necessarily include such benefits." 

The Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America, groups that represent small and nonbank lenders, are also suspicious of front-end models, particularly those involving lender recourse and risk-pooling models. Basically, these groups fear that large lenders could come to dominate the mortgage market again by securing volume discounts on GSE guarantee fees tied to front-end risk sharing products. FHFA has largely eliminated the volume discounts that large lenders once enjoyed on the fees Fannie and Freddie now charge to guarantee the payment of principal and interest on securities backed by mortgage pools.    

"CHLA is pleased that MBA's letter stresses transparency and a level playing field, both principles CHLA highlighted in our comment letter last month,” CHLA Executive Director Scott Olson said. “By comparison, though, CHLA appears to have deeper concerns about how upfront risk sharing could upset a level playing field.”

The U.S. Mortgage Insurers also recently sent a letter to the FHFA advocating for an expanded role of private insurers in front-end risk-sharing. The organization argues that deeper-coverage private insurance is the only option that guarantees pricing transparency and a level playing field for small lenders. 


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