More Ideas for Rebuilding the Secondary Mortgage Market

by devteam December 8th, 2012 | Share

The Center for American Progress hasrnreleased a letter it, along with three other groups sent to the Federal HousingrnFinance Agency (FHFA) regarding its plan to create a new securitizationrnplatform for the secondary mortgage market. rnThe letter, sent on December 3, was in response to FHFA’s request forrncomments on the plan and was co-signed by the Consumer Federation of America,rnthe National Council of LaRaza and the National Housing Conference collectivelyrnreferred to as the Mortgage Finance Working Group (the Group.)</p

The letter says that any effort tornresponsibly wind down Fannie Mae and Freddie Mac (the GSEs) and bring privaterncapital back into the mortgage market must be guided by five principles:</p<ul class="unIndentedList"<liProvide market participants with thernconfidence to deliver a reliable supply of capital ensuring access to mortgagerncredit regardless of location or the size of the lender. </li<liRein in excessive risk taking and promote reasonable productsrnbacked by sufficient capital to protect the economy from destructive boom-bustrncycles. </li</ul<ul type="disc"

  • Require underwriting, documentation, and analyticalrn standards with sufficient transparency and clarity to enable consumers,rn investors, and regulators to accurately assess and price risk, andrn regulators to verify appropriate levels of capital.</li
  • Ensure access to reasonably priced financing for bothrn homeownership and rental housing.</li
  • Ensure that the system supports the long-term interest ofrn borrowers and consumers and protects against predatory practices.</li</ul

    The proposed securitization platformrncould serve as a critical piece of infrastructure to achieve these goals forrnmortgage market reform the Group said, and can potentially lower barriers so privaterncapital can return to the market.  Additionally,rnif designed carefully to preserve the “To Be Announced (TBA)” market, thernplatform can help bring liquidity, stability, and transparency to the marketrnand ensure that all borrowers have access to safe and sustainable mortgagernproducts.  The TBA market is important tornany future system of mortgage finance because it supports a highly liquid andrntransparently priced market, lowers rates, and enables consumers to get “raternlocks” when shopping for a mortgage.</p

    With those goals in mind, the Grouprnsubmitted several broad recommendations:</p

    1.   Maintain thernsecuritization platform as a government rather than privately owned utility,rnkeeping strong oversight from the FHFA in coordination with other federalrnagencies</p

    FHFA “appearsrnto be agnostic about who controls the securitization platform in the long term,rnstating that it could ‘possibly [be]rnoffered to the market as a form of utility.’  We strongly recommend that the platform bernmaintained as a government utility, meaning the government would allow privaternactors to use the platform in exchange for a fee.  This would facilitate active and responsiblernmanagement by an impartial and empowered intermediary, avoiding conflicts ofrninterest and ensuring that all rules are being followed.”</p

    The letterrnpoints to the recent housing crisis as evidence “that private financialrninstitutions are poorly suited to regulate themselves in the mortgage-backedrnsecurities market.”   FHFA, withrnadditional resources and authority, could expand the infrastructure andrnexpertise used to oversee the utility for the GSEs to play a similar role withrnrespect to private issuers. </p

    2.   Require thatrnall mortgage-backed securities offered in the public securities market bernissued through the securitization platform</p

    Issuingrnall securities through the platform, regardless of the issuer, would promote anrnefficient, stable, and liquid mortgage market and prevent the development of arn”shadow banking” system that could circumvent the standards set for thernplatform.   It would also help level thernplaying field among large and small issuers of private mortgage-backedrnsecurities, promoting responsible competition.</p

    3.   Charge usersrntwo separate fees: one to cover administrative costs and another to fundrnprograms that expand market access</p

    The proposedrnsecuritization platform has the potential to be a very valuable asset and couldrnbring significant savings to stakeholders by offering uniform contracts,rnreliable bond administration, advanced data management, and responsiblernmonitoring.  The federal government mustrnbe adequately compensated for these services and a fee should be charged allrnparticipants to cover administrative and other costs, ensuring that thernplatform is self-sustaining and does not depend on congressionalrnappropriations.</p

    Insuring accessrnto affordable and sustainable mortgage credit must be a primary goal of anyrnreform effort the Group says and proposes the creation of a Market Access Fundrnto help test new products and promote access for traditionally underservedrnpopulations. The fund could be capitalized through an assessment on allrnmortgage-backed securities issuances with a separate, small strip on allrnmortgages bundled through the platform.</p

    4.   Adopt strong,rnloan-level disclosure requirements for the mortgage-backed securities market</p

    To avoidrnrepeating the hidden risks that led to problems during the housing bubble thernfuture market must have available more granular and reliable information onrnproduct pricing and loan-level risk.  Therngroup commends FHFA for proposing more robust security- and loan-levelrndisclosures as part of the securitization platform, and urges loan-levelrndisclosures whenever feasible and that they be available to the first-lossrnentity at the time of or as soon as practically possible after delivery of thernsecurity. </p

    The Grouprnalso recommends that information on borrower race, gender, nationality, andrngeography be collected and that regular reports eventually be made available atrnno cost to the public or at least to researchers upon request. This will helprnregulators, researchers, and concerned citizens track whether marketrnparticipants are creaming, discriminating, or otherwise denying mortgage creditrnto certain creditworthy borrowers. </p

    5.   Ensure thatrnthe new infrastructure can facilitate advanced loan monitoring andrnloss-mitigation activities</p

    When FHFA rejectedrnthe Treasury Department’s offer to help pay for principal reductions on Fannie-rnand Freddie-backed loans it cited system limitations as a key factor. Many ofrnthe systems related to these operational complexities will be revamped as partrnof the proposed securitization platform and since the agency is alreadyrnplanning to make these investments, it should devote any additional resourcesrnnecessary to addressing the aforementioned system and operational limitations,rnwith a particular focus on loss mitigation.</p

    Administrativernburden should no longer be able to serve as an excuse for neglecting criticalrnforeclosure prevention activities. The proposed platform is a promisingrnopportunity for the agency to take steps to meet its stated conservatorshiprngoal to “maintainrnforeclosure prevention activities and credit availability for new andrnrefinanced mortgages.”</p

    Inrnconclusion, we believe that the Federal Housing Finance Agency is on the rightrnpath with its plan to establish a single securitization platform, and wernappreciate the agency’s stated goal</ato design a platform that is "consistent with multiple states of housingrnfinance reform" and "capable of working well with or without various degrees ofrngovernment involvement." It is crucial for the Federal Housing Finance Agencyrnto continue to involve a broad range of stakeholders as the process movesrnforward.

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