MBA Recommends New Secondary Market Framework

As the new administration deliberates on what the government’s role should be in securing mortgage credit across the US, the Mortgage Banker's Association today released its recommendations on how to support the secondary mortgage market. The key recommendation is to create a new type of mortgage backed security that would help to ensure liquidity.

The Mortgage Bankers Association (MBA) said the new security would be supportive of the secondary real estate market for single- and multi-family homes, without putting taxpayer money at risk.

The idea is that a small number of privately-owned, government-chartered and regulated “mortgage credit guarantor entitities” would package loans into securities to be sold to investors (replacing Fannie Mae and Freddie Mac). To keep the securities attractive, risk based premiums would be paid into a federal insurance fund to protect against credit risk. 

“Each security would have two components,” a press release explained. “First, a security-level, federal government-guaranteed ‘wrap’ similar to that on a Ginnie Mae security. The government backstop would be explicit and focused on the credit risk of these mortgage securities. Second, the security would be backed by loan-level guarantees provided by privately-owned, government-chartered and regulated mortgage credit guarantor entities (MCGEs).”

The loan-level guarantee would absorb credit losses in the event of a default while the federal insurance fund would only be accessible in “situations of extreme distress.” Thus removing the credit risk from the mortgage security investor while keeping the interest rate risk on their shoulders.

The MBA said the size of the MCGEs would be determined by a mix of competition, efficiency, plus security volume and available liquidity. The strong regulator would ensure that no MCGE could become “too big to fail,” thereby providing another safeguard to taxpayer money.

Private capital backing the security would be held by the MCGEs. Credit risks would be managed by a variety of mechanisms â€