Stevensrncongratulated Fannie Mae, Freddie Mac (the GSEs) and their staffs for the jobrnthey have done in “keeping the mortgage market afloat“, but said it is time torntransition from conservatorship to a future state and time for private capitalrnto reemerge. </p

While the GSEs are now showingrnprofitability those profits and causing discussion in some sectors aboutrnreconstituting the GSEs, profits don’t tell the whole story, he said.  Profitability has been dependent on threernthings, the unilateral power to raise guarantee fees, a wave of refinancingrnbrought about by government programs, and the extended period of record lowrnrates.    </p

The willingness of FHFA to actrnunilaterally to chart the future course of the GSEs and to impose or proposernmajor policy changes (minimum net worth requirements, G-fees, thernsecuritization platform, volume limits, a new framework for reps and warrants) mayrnmake it only a matter of time before they significantly limit congressionalrnoptions for permanent reform.</p

This is the time to act – especially asrnfrom an interest rate perspective the opportunity to capitalize on transitionrnwill never be more advantageous.  Overrnthe next year, fading refinancernvolume will reduce overall mortgage activity and impair market liquidity. rnTaking action during more liquid conditions is preferable. </p

Stevens said there are many steps that must be taken to build arnreal estaternfinance system for thernfuture and Congress must do its part by moving a GSE reform package andrnrestoring a greater balance in housing finance. rnBut there are steps that can be taken outside of Congress.  </p

First, it is imperativernthat the White House name a Housing Policy Coordinator.  Second, FHFA and the GSEs must stop makingrnmarket-shifting decisions without the input of consumers or the industry, andrnthird, there must be a clear path to exit conservatorship.  To achieve the last goal requires a moverntoward a single security, additional risk sharing by the GSEs and redirectingrnthe FHFA platform initiative.  </p

Stevens said that MBArnhas been at the forefront advocating that FHFA and the GSEs, modify the FreddiernMac PC to mirror the structure of the Fannie Mae MBS and that these securitiesrnbe considered fungible for TBA delivery. “Any future state requires a commonrncurrency. This is fundamental to virtually every GSE proposal – greaterrnstandardization in the security is necessary in order to maintain liquidity”   Hernpointed out that on a typical day Fannie Mae MBS trade at ten times the volumernof the Freddie Mac PC security.  Byrnmaking MBS the common currency liquidity can be enhanced, costs reduced, andrnthe groundwork laid for a more competitive and efficient secondary market.</p

The vast majority of thernprice differential between the two securities is due solely to liquidity.  Once that is equalized prices should convergernto something very close to the current Fannie Mae level and some sort ofrnexchange should be offered for investors who want to swap old for new. </p

The fact that the GSErnnet income is being fully swept to Treasury provides an opportunity to pay forrnthis change and should eliminate objections for any reason other thanrncompetitive advantage concerns. The ongoing taxpayer subsidy, the timing basedrnon the current liquidity environment, and the GSEs’ record earnings all supportrnthe imperative to resolve this issue now, Stevens said.</p

To further encouragernprivate capital Fannie Mae and Freddie Mac should be required by FHFA to acceptrnpools with deeper levels of credit enhancement, and provide bona fidernoff-setting reductions in guarantee fees.  The GSEs are now chargingrnG-Fees that are more than twice as high compared to just a few years ago while takingrnon very little credit risk.  Allowing deeper levels of credit enhancementrnwould encourage private investors to invest more, reduce the government’srnexposure to risk, and lower guarantee fees to lenders, ultimately to thernbenefit of borrowers. </p

The new risk structure shouldrnencompass various LTV thresholds to enable different credit enhancementrnstructures to enter the market.    Private capital would be inrnthe first loss position and with multiple credit enhancement structuresrnpossible, the government would take on less risk than today. </p

Turning to the recentrnFHFA announcement of a planned common security platform, Stevens said MBA isrnconcerned that it is a major undertaking and the private sector has extensivernexperience in systems development of this size and will likely bear the bruntrnof any mistakes or delays in getting the platform operational.  Ifrnconstructed well, with industry input and ownership, a central platform couldrnprovide a significant benefit in terms of an efficient and standardizedrnprocess.  But if put together too quickly without sufficient stakeholderrninput, it could be a costly endeavor that cements in today’s marketplace andrnunintentionally blocks competitors in the space.  “We should insist on a process that requiresrnindustry involvement,” he said.</p

The steps MBA isrnproposing, have benefits for lenders that are large and real, and costs that arernminimal to non-existent.  </p<ul class="unIndentedList"<liMoving to a singlernsecurity will increase liquidity in the market which will benefit everyone, andrnunder current market conditions including the Fed purchases, the transitionrncosts are easily manageable. </li<liBy offering lower G-feesrn(or LLPAs) in exchange for deeper credit enhancements, lenders are once againrnable to have more control over managing the credit risk of their deliveries tornthe GSEs. Lenders would still be able to deliver under the full G-feernstructure, this would be providing them an option, and options have value.</li<liFinally, lenders shouldrnhave a direct role in influencing the direction of the platform. More inputrnfrom industry will result in a better product.</li</ul

The beauty of this plan,rnStevens said, is that it can be done outside the halls of Congress.  Itrncan and should be done now while the risk to the marketplace is minimal; hernpromised to deliver the plan personally to FHFA in the hopes of generatingrngreater momentum toward transition.

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