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MBA unveils plan for housing-finance reform

The nation’s largest mortgage trade group unveiled a vision of a future housing-finance system that would turn Fannie Mae and Freddie Mac into private utilities and secure most mortgage-backed bonds with an explicit federal guarantee.

The Mortgage Bankers Association’s (MBA's) plan would require Congress to enact significant changes to the charters of Fannie and Freddie, and also create an insurance fund that would back the securities issued by Fannie and Freddie and other private entities.

housingfinanceFannie and Freddie were bailed out in 2008 and placed in conservatorship under the Federal Housing Finance Agency (FHFA). The current system, including the government’s guarantee to bailout Fannie and Freddie in the event they can’t cover their losses, would likely remain in place for some time yet, however. 

“The transition is likely to take several years, a long time,” said MBA’s chairman, Rodrigo Lopez, who chaired the task force that developed the plan. “We want to make sure the system is systematic to avoid market disruptions.”

Politically, MBA’s proposal faces an uncertain fate. There are several competing plans to reform the financial system and little agreement in Washington.  

“It is clear that discussion will be a marathon, not a sprint,” said Bill Killmer, MBA’s senior vice president of legislative and political affairs. Killmer said the timing of the plan's release is good because the Trump administration’s presumptive Treasury secretary, Steven Mnuchin, has said housing-finance reform will be a priority for the administration.

Under the MBA’s plan, a newly constituted Fannie and Freddie would function as shareholder-owned companies that would buy home and multifamily mortgages and securitize them. This new system also envisions other chartered entities entering the market as competitors. Shares in these entities could not be held by lenders or banking holding companies.   

Fannie, Freddie and these other entities would compete against each other over service and product offerings, but not on prices. Under this system, the entities would not be able to make risky investment plays in order to maximize rates of return for shareholders.

MBA’s plan also calls for making use of an existing infrastructure developed during the Obama presidency. These entities would issue bonds through a common securities platform, which has been under development by Freddie and Fannie and the FHFA. That platform would be converted into a government-owned corporation. The newly constituted Fannie and Freddie and other entities also would be required to hold more capital in reserve than they did prior to the Great Recession, and take a first-loss position when loans default.

The government wouldn’t guarantee the entities themselves or the underlying mortgages, but would back the securities issued against the mortgages by the entities. This is similar to how Ginnie Mae guarantees the securities underpinned by Federal Housing Administration (FHA) and other government-guarantee programs. The cost of capitalizing this guarantee fund ultimately would be paid for by borrowers.

Under this system, Fannie, Freddie and other chartered entities could potentially fail and go out of business, but their securities would be guaranteed by the federal government. That explicit guarantee would be needed to ensure investor interest in the bonds and liquidity for the mortgage market. One of the goals of this plan is to preserve the 30-year mortgage, but scale back the taxpayers' exposure.

MBA Chief Economist Mike Fratantoni told reporters that consumers might face modestly higher prices for mortgages if the plan is adopted. He noted that the overall system would be more secure and the bonds would be more valuable to investors, which would somewhat offset the costs for borrowers.

MBA plans to follow up with a more detailed paper in April on the costs for borrowers, the affordable-housing goals and the steps to transition into this new system.

MBA officials also emphasized that the new system would be designed so mortgage lenders of all sizes would be able to participate on a level playing field. Congress would write into the charters of the new entities that they provide fair access to companies of all sizes and don’t discriminate over price.The entire system would require close government oversight by several regulatory agencies.

Reaction from the Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA) — which represent smaller lenders and have been highly suspicious of past reform proposals — was subdued.

“As with all the GSE [government-sponsored enterprise] reform proposals, CHLA's assessment is shaped by our primary objective of fair and competitive access for community lenders, both to a cash window and a securitization option,” CHLA Executive Director Scott Olson said. “At a minimum, this means no pricing discrimination by risk-sharing entities based on size or volume — preventing Wall Street banks from using securitization powers to dominate loan origination — and full transparency."

CMLA Executive Director Glen Corso said the MBA plan “has many interesting and worthwhile elements.”

Other analysts who support a more market-based system of housing finance were less enthusiastic, however.

“Their plan reintroduces many of the issues of ‘private gain and public loss,’ complexity, cost, underpricing of risk and other issues contained in their prior proposals and prior unworkable legislative proposals,” said Josh Rosner, managing director with the consulting firm Graham Fisher & Co.


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