DeMarco Discusses The New Securitization System Set To Replace Fannie / Freddie

Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) sketched in a broad outline of the agency's vision for the future of the mortgage finance markets in the coming years, a future that may or may not include Fannie Mae and Freddie Mac.  Speaking to the National Association of Federal Credit Unions Congressional Caucus, DeMarco said his agency has identified three goals for the next phase of its conservatorship of the two government sponsored enterprises (GSEs):

1.      Build a new infrastructure for the secondary mortgage market.

2.      Gradually contract the GSEs' dominant presence in the marketplace while simplifying and shrinking their operations; and

3.      Maintain foreclosure prevention activities and credit availability for both new and refinanced mortgages.

DeMarco said that building toward a future housing finance system requires building systems like a securitization platform and standards for the secondary market that are accessible to small, mid-size, and large markets alike.  A new securitization platform for the secondary market is key to this vision. 

There may be confusion, he said, between a platform and the establishment of a single GSE security.  Security performance has been a long standing issue and establishment of the conservatorship has affected this issue in various ways.  "Our immediate priority is a single, common platform not a single security," he said.

FHFA plans that this platform would be a utility that would outlast the GSEs.  DeMarco said he strongly believes in competitive markets and, as a utility, the platform should enhance liquidity, standardization, and transparency, all of which should foster that competition.   Whatever the structure of the secondary market of the future, certain key functions will need to be performed and in many cases, like developing data reporting standards, the standardization of such functions will benefit the overall market.

In building a platform the agency is committed to obtaining input from all market stakeholders. The GSEs are participating in developing this infrastructure and identifying the issues that would benefit from public input and DeMarco said he expects the actual building the platform to be a multi-year effort and  FHFA will release a white paper next month on a proposed platform infrastructure to service as a basis for public comment.

DeMarco said that as FHFA and other players prepare to transition to a new secondary post-conservatorship market he anticipates that the GSEs will maintain their own distinct securitization operations and continue to issue their own securities. 

DeMarco also restated announcements he had made earlier in the week about the future path of guarantee fees and a new structure for representations and warrantees. He told an audience of attendees at American Mortgage Conference on Tuesday that guarantee fees, which have risen twice in the last year, will continue on a path of gradual increases to bring GSE pricing closer to what it would be were mortgage credit risk borne solely by private capital.  This, it is hoped, could begin to incentivize private firms to increase their participation in the mortgage market.

In addition, a new framework for representations and warrantees will go into effect on January 1 which will clarify lenders' repurchase exposure and liability for future deliveries and relieve lenders of certain repurchase obligations for loans that meet specific payment requirements including exempting new loans that have had on-time payment performance for 36 months and refinancing loans with that record over 12 months.