Mortgage Bankers Association
Nearly everyone wants to forget about the Great Recession, but some vestiges of that economic downtown remain. Several industry groups, in particular those involved in the housing and real estate industry, have been working on proposals to work though some of these lingering issues.
In particular, issues with the two government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac – that were put into conservatorship during the downturn have raised concerns. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac, are both U.S. government-sponsored enterprises that provide liquidity to the thousands of banks, mortgage companies and other financial institutions that make loans to finance housing.
Treasury Secretary Steve Mnuchin has said the administration will make some proposals on reforming these GSEs, but the timeframe remains a bit unclear.
The largest trade group in the mortgage finance space, the Mortgage Bankers Association, in April released a white paper titled “GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market” that outlines a plan for the future.
The white paper also includes a discussion of the role of the secondary market in advancing an affordable housing strategy.
The task force that developed the white paper represents a broad cross-section of the residential and multifamily real estate finance industries, including entities of varying sizes and business models, according to the MBA.
David Motley, president of Fort Worth-based Colonial Savings F.A. and its divisions – Colonial National Mortgage and CU Members Mortgage – is chairman-elect of Washington, D.C.-based MBA. Colonial is a privately held, nationwide residential mortgage lender, as well as a depository and a commercial bank. It has eight depository branches in the Dallas-Fort Worth area and 21 loan production offices around the country. Colonial was founded in 1952 by Jimmy DuBose, who is now chairman emeritus.
Motley says the time to take action is now, while the housing market is solid.
“You know, Fannie Mae and Freddie Mac were put into conservatorship in September of 2008,” he said. “So it’s been almost nine years in conservatorship. They’ve been taxpayer supported for the last nine years.
“Between the two of them they took about a $187 billion draw at essentially no interest from the taxpayers, from the Treasury Department.”
While the home-buying market has been good for several years and credit quality has “never been better,” Motley said, now is the time to make reforms, not in the middle of a crisis.
“There’s likely to be a downturn in the economic cycle,” he said. “Defaults will likely go up at some point because of some unknown economic event.”
To make those changes, Congress would need to establish the government’s explicit guarantee on the mortgage-backed securities, he said. “It would call for these entities to charge fees for that guarantee work to be done. It would encourage other competitors to Fannie Mae and Freddie Mac to come into that business and compete for the lowest possible rates to drive pricing down. And lenders would be able to close mortgages, get them guaranteed by Fannie, Freddie or some other entity, and then sell those securities in the secondary market as they have done for years and years.”
If some action toward a solution can move forward it would help both the industry and taxpayers, said Motley.
“While we’re not under pressure and times are really pretty good, we need to have a good solution for the future,” he said.
“That takes taxpayers out of the direct line of fire for risk of these two companies having a problem. And so what the mortgage bankers are concerned about, and others, is that these two entities are not resolved. They’re still in conservatorship.”
Motley said the GSE reform package would reduce taxpayer risk, taking taxpayers out of the “first loss position.”
“Our proposal would do that by putting borrower equity at risk first, and then other credit enhancements like private mortgage insurance,” he said. “And then we would have these private entities, privatizing Fannie Mae and Freddie Mac and some other entity like them, that would take the next risk position. And then below that, those would be private entities, and below that the government would guarantee the mortgage-backed securities that those two entities (or others) issued. So that investors in the mortgage-backed securities market could be assured of being paid.”
Motley said the proposal is not something created out of the blue, a similar procedure is in place for Ginnie Mae securities.
“Ginnie Mae securities are backed by FHA and VA mortgages. In this scenario these mortgage-backed securities that would be issued by Fannie Mae and Freddie Mac would be backed by conventional conforming loans,” he said.
Part of the U.S. Department of Housing and Urban Development, Ginnie Mae (Government National Mortgage Association) aims to ensure liquidity for government-insured mortgages, including those insured by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service.
“It’s not like we’re in uncharted territory of how this would work,” said Motley.
No legislation has come to the floor of the House of Representatives regarding these proposals as other items have been ahead of it on the Trump Administration’s agenda, such as health care and tax reform.
“We really don’t see that happening until sometime after August of this year, but probably more likely next year,” he said.
The Mortgage Bankers Association GSE Reform Plan
• Maintain the liquidity and stability of the primary and secondary mortgage markets through the establishment of a resilient and vibrant housing finance system, throughout the transition process to the end state.
• Replace the implied government guarantee of Fannie Mae and Freddie Mac with an explicit guarantee at the mortgage-backed security (MBS) level only, supported by a federal insurance fund with appropriately priced premiums.
• Protect taxpayers by putting more private capital at risk through expanded front- and back-end credit enhancements.
• Inject much higher levels of risk-bearing private capital into the mortgage system, while dramatically reducing the system’s reliance on government support.
• Enhance the stability of the mortgage system with multiple guarantors that will operate as privately owned utilities.
• Protect taxpayers and consumers with a clear set of market conduct rules, prudential requirements and a new federally backed Mortgage Insurance Fund (standing behind the mortgage-backed securities, not the guarantors themselves) financed with appropriately priced insurance premiums.
• Ensure that mortgage lenders of all sizes and business models have equal access to the secondary market.
• Improve service and performance in the secondary market with multiple guarantors competing on operations and systems development, customer service, product parameters and innovation, and pricing and execution.
• Minimize disruption during the transition to the new system by preserving what works in the current system and using the existing regulatory framework where appropriate.
• Meet the needs of the full continuum of households, from families requiring the most directly subsidized, affordable rental homes to those served by the completely private, jumbo single-family lending market.