New House Proposal on Evolution of the Secondary Mortgage Market

The Chairman of the House committee thatrnhas been most active in the proposed dismantling of Freddie Mac and Fannie Maernhas released his proposal to reform the secondary mortgage market.  Rep. Scott Garrett (R-NJ) who heads thernFinancial Services Subcommittee on Capital Markets and Government-SponsoredrnEnterprises said his proposal intends to ensure robust private investment inrnthe market without a government guarantee. rnHis proposal would also abolish the risk-retention or so-called “skin-in-the-game”rnprovisions of the Dodd-Frank Financial Reform Act.</p

Accordingrnto a press release from Garrett’s office, under his plan the Federal HousingrnFinance Administration (FHFA) will be directed to develop several categories ofrnmortgages and develop uniform underwriting standards for each as well asrnstandards and uniform securitization agreements, representations, andrnwarrantees.  The process for selling torninvestors will be streamlined for securities that meet the new standards and FHFArnwill be given authority to ensure underwriting and securitizationrnstandardization compliance.</p

Garrett said that his proposal wouldrnalso ensure “rule of law and legal certainty” by removing conflicts of interestrnbetween servicers and investors, clarifying the rules around the eligibility ofrnobtaining second lien mortgages and requiring mandatory arbitration ofrndisagreements between investors and issuers regarding reps and warrants.  </p

Under the proposal regulators wouldrnbe prevented from unilaterally forcing investors to reduce the principal ofrnloans in which they have invested and would allow for the appointment of anrnindependent third party to act on behalf of investors in mortgage-backedrnsecurities (MBS).</p

To address issues of transparencyrnand disclosure the quality of loan level information and disclosures torninvestors would be increased and investors would be guaranteed sufficient timernto review and analyze disclosed information before making investment decisions.  Lenders would have to disclose pricingrnhistory on securitization deals and an individualized marker would be createdrnfor each loan within a loan package.  Servicersrnwould also be required to use standardized accounting and reposting for anyrnloan workouts</p

“Sincerntaking control of the House in January, we have remained steadfast in our drivernand determination to end the ongoing bailout of Fannie Mae and Freddie Mac,rnprotect taxpayers from future bailouts, and encourage private capital tornre-enter the secondary mortgage market,” Garrett said.  “Now that we haverntaken the important step of introducing a series of bills to wind down therngovernment-backed mortgage twins, it’s time to start thinking about the ways werncan jumpstart the private market to step in once they’re gone.”  </p

According to Reuters, Garrett and other Republicanrnmembers of the House have already introduced 15 separate bills in an effort “tornchip away at the role Fannie and Freddie play in the secondary mortgage market.</p

Video: Secondary Mortgage Market Reform</p

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