What Role Will the Government Play in a Reformed Housing Market?

EdwardrnJ. DeMarco, Acting Director of the Federal Housing Finance Agency, told membersrnof SIFMA this afternoon that “The secondary mortgage market infrastructure that served this country for many yearsrnis broken.”  It is not effectivernwhen it comes to adapting to market changes, issuing securities that attractrnprivate capital, aggregating data, or lowering barriers to market entry hernsaid.  There must be some updating andrncontinued maintenance of the government sponsored enterprises securitizationrninfrastructure, “and to the extent possible, we should invest taxpayers’rndollars to this end once, not twice.”</p

He told SIFMA members that, asrnthose who invest in the secondary market, they are uniquely positioned to contribute to policy discussions aboutrnthe future of the housing finance system. There are many views and many importantrnissues about access to credit and fair treatmentrnforrnborrowers,rnand fostering a competitivernprimary and secondary mortgage market.rnBut if we really are seriousrnabout expandingrnthe private sector’s role in housing finance, we must consider whatrntypes ofrnchanges are necessary to bring private capitalrnback to the housing finance market.</p

Thernconservatorships of Fannie Mae and Freddie Mac were never intended to be<blong-term solutions.  They were meant asrna “time-out” as the market was eroding and a way to provide some stabilityrnwhile decisions were made about rebuilding the housing finance system.  Today the government is involved in nine outrnof every ten mortgages so it is essential that the mortgage market transitionrnto a more secure, sustainable, and competitive market.</p

DeMarcornsaid that the country’s regulatory infrastructure sets and enforces certainrnrules of the road; in part to ensure that fraud or poor business decisionsrndon’t create spillover costs for the system but also to add certainty andrntransparency; protect customers and promote access to credit.  But the owners of private capital must makerninformed decisions about the allocation of resources to promote economic growthrnand prosperity.</p

“In the mortgage market, that meansrnwernneed established rules by which everyone abides.rnBut we also need competitive markets andrnmarket participantsrnoperating withinrnthose rules to ensure that credit isrnavailable tornhelp families purchase homesrnand rent houses andrnapartments. rnA competitivernprivate marketrnsystemrnalso ensures that suchrncapital is efficiently allocatedrnbetween housing andrnall other sectors.”</p

Regardless of how thernconservatorships are resolved, the Acting Director said, we know the nationrnwill need a healthy and efficient secondary market and FHFA has set out torndevelop a framework that will serve the GSEs in the short term and have broadrnapplication in the future.  </p

FHFA recently issued a whiternpaper in which the development of a new infrastructure was divided into tworncomponents; the “physical” infrastructure or platform which comprises therntechnology that drives the existing secondary market operations and thern”virtual” infrastructure, meaning the contractual provisions that governrnsecondary market transactions.</p

The Enterprises’ outmodedrnproprietary infrastructures need to bernupdated and maintained, DeMarco said, and any such update shouldrnprovide enhanced value to the mortgage market withrna commonrnand more efficient model.  FHFA has undertaken this effort withrnthe goal that it willrnhave benefits beyondrnthe GSE business model. Therefore, this new infrastructure mustrnbe operable across many platforms,rnso that it can be used by any issuer, servicer, agent,rnor other party that decides to participate.</p

In thernwhite paper FHFA raised the issue of the platform’s scope.  The focus couldrnbe on functions thatrnarernroutinely repeated acrossrnthe secondary mortgage market, suchrnas issuing securities,rnproviding disclosures, paying investors, and disseminating data.  Each is a function where standardization couldrnhavernclear benefits to market participants.  For example,rnif there is to be some type of federal guarantor of mortgage-backed securities,rnthat guarantor will needrnthese functions performed.rn Private-labelrnmortgage-backed securities marketrnmight also benefit fromrnsuch a utility. Providing standardization acrossrnkeyrnmortgage market functionsrnshould add depth and liquidity tornthe market.</p

The second component ofrnthe securitization infrastructure -rnthe contractual framework – is governed in the current securitization modelrnbyrnthe GSEs’ Selling andrnServicing Guides. Thesernset forth the rules thatrnsellers must follow to obtain the GSE guaranteernand the rules for servicing mortgages, including thernproceduresrnthat must be followed to address delinquentrnloan servicing.</p

The equivalent in the private-label securitization market is thernPooling and Servicing AgreementrnorrnPSA, a legalrndocument that lays out the responsibilities and rights ofrnthe servicer, the trustee, andrnothersrnover a poolrnof mortgage loans.  While the PSA covers some of the same issuesrnas the Guides, there has been more variation in the individual agreements.  Variation in terms can leadrnto tailoring of transactions to meet particular investor requirements, but greater standardization in some areas could addrnmore liquidity andrnmore certainty tornthe market.  Inrnaddition, as became evidentrnduring the financial crisis,rnthe responsibilities of various parties in thernPSA agreementsrnmayrnhave made resolution of issues more difficult and added to thernlosses of many investors.</p

While thernGSE’s are working toward harmonizingrnrequirements in their respective Seller andrnServicing Guides,rnthis is an optimal timernto further consider how bestrnto address contractualrnshortcomings identified during the past few years. </p

Some of the work already underway</bwhich will fit into the various parts of a new infrastructure for housingrnfinance are:</p<ul class="unIndentedList"<liThernUniform Mortgage Data Program is improving the consistency, quality andrnuniformity of data gathered at origination and for servicing. Common data definitions, electronic datarncapture, and standardized data protocols will improve efficiency, lower costs,rnand enhance risk monitoring.</li<liSettlingrnon servicing standards will provide clarity on how troubled loans will bernserviced and FHFA's Servicing Alignment Initiation produced a single set ofrnprotocols for both GSEs which may serve as a basis for national servicingrnstandards.</li<liFHFA'srnJoint Servicing Compensation Initiation is considering alternatives for futurernmortgage servicing compensation.</li<liThernRepresentation and Warranties framework long used by the GSEs did not work wellrnunder stress conditions so the GSEs have developed a new framework that willrnclarify lenders repurchase exposure and liability on deliveries after Januaryrn1. </li<liThernLoan-Level Disclosures announced last year will help establish consistency andrnquality of data for investors in Enterprise MBS.</li</ul