Tag Archives: guarantee

Life Post-Fannie, Post-Freddie

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The Congressional Budget Office has released a report, Transitioning to Alternative Structures for Housing Finance. This report

examines various mechanisms that policymakers could use to attract more private capital to the secondary mortgage market. The report also addresses how those mechanisms could be combined in different ways to help the market make the transition to a new structure during the coming decade. CBO analyzed transition paths to four alternative structures that involve choices about whether the government would continue to guarantee payment on mortgages and MBSs and, if so, what form and prices those guarantees would have. Under those different structures, the government’s activities would range from providing full or partial guarantees for a large share of the mortgage market to playing a minimal role in a largely private market (except perhaps during a financial crisis). Any transition to a new type of secondary market would also require decisions about what to do with the existing operations, guarantee obligations, and investment holdings of Fannie Mae and Freddie Mac. (1, footnotes omitted)

The report has three key findings:

1.  A transition to a new structure for housing finance that emphasized private capital could reduce costs and risks to taxpayers. One drawback to such a transition is that mortgages could become somewhat less available and more expensive to borrowers. Thus, over the longer term, it could also result in a modest shift of the economy’s resources away from housing toward other activities.
2.  Although the transition to a new structure could significantly decrease the number of borrowers who received mortgages backed by Fannie Mae or Freddie Mac, additional private capital would replace most of the lost funding. Borrowers would probably not face significant increases in interest rates because the two GSEs’ current pricing is not too far below market pricing. Consequently, a gradual transition would probably exert only modest downward pressure on house prices.
3.  Because policymakers have already raised the guarantee fees charged by Fannie Mae and Freddie Mac close to those that CBO estimates would be charged by private insurers, the budgetary costs of the two GSEs’ activities over the next 10 years are expected to be small. As a result, the budgetary savings would also be small under any of the transition paths to a more private system that CBO considered. Thus, the choice between the different market structures probably rests primarily on considerations other than budgetary costs. (2)
I have been a long-time advocate for attracting more private capital to the secondary mortgage market, so I welcome this report. Given the public statements of the Obama Administration and the composition of the new Congress, there appears to be an opportunity to move in that direction. A bipartisan reform plan for the housing finance system will need to provide for a lender of last resort; appropriate consumer protection; and assistance for households that are underserved by the private market. There seems to be bipartisan will to reform this system, so we just need to chart a way to achieve it. This report leads us down the right path.

What Should the 21st Century Mortgage Market Look Like?

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Treasury is requesting Public Input on Development of Responsible Private Label Securities (PLS) Market.  Comments are due on August 8, 2014. The request for information wants input on the following questions:

1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?

2. What are the key obstacles to the growth of the PLS market? How would you address these obstacles? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?

3. How should new issue PLS support safe and sound market practices?

4. What are the costs and benefits of various methods of investor protection? In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances?

5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?

6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?

7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?

8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?

These are all important questions that go way beyond Treasury’s portfolio and touch on those of the FHFA, the FHA and the CFPB to name a few. Nonetheless, it is important that Treasury is framing the issue so broadly because it gets to the 10 Trillion Dollar Question:  Who Should Be Providing Mortgage Credit to American Households?

Some clearly believe that the federal government is the only entity that can do so in a stable way and certainly history is on their side.  Since the Great Depression,when the Home Owners Loan Corporation, the Federal Housing Administration and Fannie Mae were created, the federal government has had a central role in the housing finance market.

Others (including me) believe that private capital can, and should, take a bigger role in the provision of mortgage finance. There is some question as to how much capacity private capital has, given the size of the residential mortgage market (more than ten trillion dollars). But there is no doubt that it can do more than the measly ten percent share or so of new mortgages that it has been originating in recent years.

Treasury should think big here and ask — what do we want our mortgage finance to look like for the next eight or nine decades? Our last system lasted for that long, so our next one might too. The issue cannot be decided by empirical means alone. There is an ideological component to it. I am in favor of a system in which private capital (albeit heavily-regulated private capital) should be put at risk for a large swath of residential mortgages and the taxpayer should only be on the hook for major liquidity crises.

I also favor a significant role for government through the FHA which would still create a market for first-time homebuyers and low- and moderate-income borrowers. But otherwise, we would look to private capital to price risk and fund mortgages to the extent that it can do so.  Round out the system with strong consumer protection regulation from the CFPB, and you have a system that may last through the end of the 21st century.

Comments are due August 8th, so make your views known too!

CRL Issues Report on State of Lending

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The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households.  CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred.  And while they are consumer advocates, their research is solid.

Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”

• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.

• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.

• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)