On the theory that Fannie Mae and Freddie Mac cannot remain in conservatorship forever, on April 20, 2017, the Mortgage Bankers Association (MBA) issued a proposal for reform of Fannie Mae and Freddie Mac, titled “GSE Reform: Creating a Sustainable, More Vibrant, Secondary Mortgage Market” (accessible at the MBA’s GSE Reform web page). While the ultimate fate of any GSE reform effort in the current political environment is uncertain, there is at least a consensus that the Congress and the Trump administration should undertake such an effort, and each has promised to do so. The MBA’s proposal is intended to provide a voice for the mortgage banking industry in that process.
The proposal includes a mixture of changes to the GSE system as it exists today, and maintenance of existing processes and structures the MBA believes work well. It proposes a replacement or conversion of the GSEs with “Guarantors,” which would guaranty mortgage backed securities (MBS). The Guarantors would be structured as “private utilities”, meaning that they would be privately owned, but established through a government charter for the primary or exclusive purpose of providing the MBS guaranty, and heavily regulated. Think of a privately owned electric company, that is granted the right to participate in the electricity market, on the condition that it complies with various regulatory requirements and oversight, including rate approvals. The proposal even quotes from a paper regarding investor-owned electrical utilities. The expectation, as stated in the proposal, is that the Guarantors would be “low-volatility companies that would pay steady dividends over time, not growth companies that aggressively seek to expand market share or generate above-market returns.” Guarantors’ MBS guaranty would then be supplemented with an explicit government guaranty of the MBS, which would only be used if a Guarantor failed, and would only be used to support the MBS, not the Guarantors and their private investors.
The following is an outline of key elements of the MBA’s proposal, divided into elements reflecting changes to the current system, and those reflecting continuation of the current system in a similar form.
- Termination of conservatorship of Fannie Mae and Freddie Mac and re-chartering as the first two privately-held Guarantors of mortgage backed securities, or transfer of some or all of their assets to the first two Guarantors.
- Procedures allowing private parties to charter additional Guarantors, similar to chartering mechanisms for banking institutions, and not requiring additional legislative action like that used for chartering the GSEs.
- Guarantors operated and regulated as “private utilities”, restricted to their one line of business, and with required levels of capitalization, prudential oversight by a government regulator (the Federal Housing Finance Agency or a successor), and limits on permitted rates of return on capital.
- Ownership of each Guarantor by any lender or bank holding company limited to 10%, in order to prevent vertical integration and control by lenders, but permitting mutual ownership by a group of lenders or banks, if desired.
- Potential designation of the Guarantors as systemically important financial institutions by the Financial Stability Oversight Council, and related regulatory requirements and oversight, in accordance with existing Dodd-Frank standards.
- Explicit government backing of mortgage backed securities (but not the Guarantors) through a new federal mortgage insurance fund, using insurance premiums paid by the Guarantors, which such backing would only be available if a Guarantor fails.
- No portfolio holding of loans by Guarantors, other than as necessary to aggregate loans from cash-window purchases prior to securitization, or for delinquent loan buyouts and loss mitigation.
- Issuance of a single form of mortgage backed security by the Guarantors, through the use of the Common Securitization Platform (CSP) currently under development.
- Transfer of the operation of the CSP (currently a joint venture of the GSEs) to a government corporation, self-funded through the imposition of administrative fees, and transfer of all GSE’s historical data to the CSP, to permit access to all Guarantors and other market participants for a fee.
- Continuation by Guarantors of existing GSE processes for delivery of mortgage loans, including cash-window and MBS delivery, and servicing structures and requirements.
- Continuation of current prohibitions on variations in guaranty fees based on volume of loans or size of lenders, in order to protect access of smaller lenders.
- Continued and expanded use of risk sharing structures currently used by the GSEs, including “front end” risk sharing (including recourse and mortgage insurance), and “back end” risk sharing (including reinsurance and structured risk sharing bonds).
- Continued exclusion of Guarantors from the primary mortgage market.
- Continued commitment to affordable housing goals, through establishment of plans by regulators, and imposition of related requirements for the Guarantors, and including support for multifamily lending for the ultimate benefit of renters (some of which may involved changes to existing government policies and methods of implementation).
The MBA’s 60-page proposal goes into considerably more detail than provided here, of course. For example, it contains extensive detail regarding possible methods of establishing capital requirements for the Guarantors and the multi-year transition process from the GSEs to Guarantors, including the various ways the GSEs entities could be converted into, or their assets moved, to the Guarantors. Rather than recommending any particular approach in these areas, it provides the options in the hopes of facilitating the reform process within the legislature and administration, whatever form it may take.