Mortgage Bankers Post latest Open Letter to Congress on GSE Reform on 2-14-2018. Interestingly, I have not seen David Stevens on the signature list of the letter.
“It has been almost ten years since Fannie Mae and Freddie Mac were placed into conservatorship,” the letter said (GSE_Reform_Letter signed 2.13.18). “The undersigned lending institutions active in the mortgage markets are encouraged by the recent progress in Congress on comprehensive housing finance reform.”
The letter outlines common core principles for secondary market reform, similar to those advocated by MBA in its white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (https://www.mba.org/issues/gse-reform):
–An explicit federal guarantee on mortgage securities to preserve the 30-year fixed rate mortgage and long-term financing for multifamily rental housing,
–Significantly more private capital at risk ahead of the taxpayer, and
–A utility-style regulatory framework to ensure a level playing field and equal access to the secondary market for lenders of all sizes and business models.
“With those principles in place, it is critical for a reformed system to preserve the operational integrity needed to ensure that mortgage capital markets will work effectively through transition and beyond,” the letter said. Options include:
–A “guarantor-based” system that builds on and improves the current system with two or more entities chartered to operate solely in the secondary market by acquiring and securitizing mortgages from small and large lenders alike; and
–An “issuer-based” system that relies primarily on a handful of larger “lender-aggregators” to originate and/or acquire mortgages from smaller lenders and issue the securities themselves, after securing the federal guarantee.
Additionally, the letter outlined the bankers’ belief that a guarantor-based system is best able to meet the housing finance needs of Main Street.
Tim Howard’s comments,
At outset: Congress enacts legislation that specifies end state and outlines transition process.
Phase 1: Preparation planning, regulations, creation of Mortgage Insurance Fund, Common Securitization Platform transition, Single MBS for Single Family, formation of new entity structures, technology readiness, acceptance of new entrant applications.
Phase 2: Implementation transfer of GSE assets; regulatory chartering of Guarantors; wind down of GSEs; start-up and operation of SF and MF Guarantors, including issuance of MBS backed by MIF; build-up of Guarantors’ capital base; action on new entrant applications.
Phase 3: Divestiture: Government sale of its interests in the Guarantors to private investors, and continued regulation and operation of Guarantors under new framework.
The “utility-style regulatory framework” was an element of the MBA’s April 2017 white paper, and the only significant one that wasn’t incorporated into draft 29 of Corker-Warner 2.0. The MBA is still pushing for that, so it’s not surprising that some of its members wrote Congress in support of it.
What I find surprising about it,though, is that the MBA either doesn’t realize–or thinks other people won’t notice–that utility-like regulation and returns for credit guarantors are incompatible with another reform recommendation the MBA is even more insistent upon: the need for multiple guarantors to create competition. Companies subject to utility-type regulation typically are allowed to be the only providers of that regulated product in the markets they serve. Open entry to competitors threatens the one aspect of their profitability utilities otherwise could count on: the volume of business they do. (You don’t see anyone claiming that there would be great benefits from giving consumers three or four power companies to choose among). Moreover, with regulated returns you would virtually ensure the performance alignment I discussed in this post, undermining the MBA’s (and others’) ability to claim that the federal government could guarantee the mortgage-backed securities of multiple credit guarantors without also implicitly guaranteeing the companies themselves. Multiple credit guarantors with the same capital requirements, regulated returns, close regulation and supervision and the same menu of products to guarantee would have financial performance that would be indistinguishable from each other. I’m beginning to think that the MBA and other bank supporters know this, but are willing to pretend it isn’t so in order to have a better story for why legislation that favors them also is good for everyone else.
On the MBA members’ letter itself, there was one aspect of it that I found very odd. In arguing for the multiple-guarantor model the MBA supports, they claim that the current debate is focused on “two leading options,” the second of which is “an ‘issuer-based’ system that relies primarily on a handful of larger ‘lender-aggregators’ to originate and/or acquire mortgages from smaller lenders and issuing the securities themselves, after securing the government guarantee.” I don’t know who is pushing for that option. (The other “leading option,” I would submit, is releasing Fannie and Freddie from Treasury-imposed captivity.) But creating a straw man always is a good way to make a weak recommendation look better.
In addition, I have found from https://www.mba.org/issues/gse-reform that MBA still intends to kill GSE, see phase two as follow,