More Ideas for Rebuilding the Secondary Mortgage Market

The Center for American Progress has released a letter it, along with three other groups sent to the Federal Housing Finance Agency (FHFA) regarding its plan to create a new securitization platform for the secondary mortgage market.  The letter, sent on December 3, was in response to FHFA's request for comments on the plan and was co-signed by the Consumer Federation of America, the National Council of LaRaza and the National Housing Conference collectively referred to as the Mortgage Finance Working Group (the Group.)

The letter says that any effort to responsibly wind down Fannie Mae and Freddie Mac (the GSEs) and bring private capital back into the mortgage market must be guided by five principles:

• Provide market participants with the confidence to deliver a reliable supply of capital ensuring access to mortgage credit regardless of location or the size of the lender.
• Rein in excessive risk taking and promote reasonable products backed by sufficient capital to protect the economy from destructive boom-bust cycles.

• Require underwriting, documentation, and analytical standards with sufficient transparency and clarity to enable consumers, investors, and regulators to accurately assess and price risk, and regulators to verify appropriate levels of capital.
• Ensure access to reasonably priced financing for both homeownership and rental housing.
• Ensure that the system supports the long-term interest of borrowers and consumers and protects against predatory practices.

The proposed securitization platform could serve as a critical piece of infrastructure to achieve these goals for mortgage market reform the Group said, and can potentially lower barriers so private capital can return to the market.  Additionally, if designed carefully to preserve the "To Be Announced (TBA)" market, the platform can help bring liquidity, stability, and transparency to the market and ensure that all borrowers have access to safe and sustainable mortgage products.  The TBA market is important to any future system of mortgage finance because it supports a highly liquid and transparently priced market, lowers rates, and enables consumers to get "rate locks" when shopping for a mortgage.

With those goals in mind, the Group submitted several broad recommendations:

1.   Maintain the securitization platform as a government rather than privately owned utility, keeping strong oversight from the FHFA in coordination with other federal agencies

FHFA "appears to be agnostic about who controls the securitization platform in the long term, stating that it could 'possibly [be] offered to the market as a form of utility.'  We strongly recommend that the platform be maintained as a government utility, meaning the government would allow private actors to use the platform in exchange for a fee.  This would facilitate active and responsible management by an impartial and empowered intermediary, avoiding conflicts of interest and ensuring that all rules are being followed."

The letter points to the recent housing crisis as evidence "that private financial institutions are poorly suited to regulate themselves in the mortgage-backed securities market."   FHFA, with additional resources and authority, could expand the infrastructure and expertise used to oversee the utility for the GSEs to play a similar role with respect to private issuers.

2.   Require that all mortgage-backed securities offered in the public securities market be issued through the securitization platform

Issuing all securities through the platform, regardless of the issuer, would promote an efficient, stable, and liquid mortgage market and prevent the development of a "shadow banking" system that could circumvent the standards set for the platform.   It would also help level the playing field among large and small issuers of private mortgage-backed securities, promoting responsible competition.

3.   Charge users two separate fees: one to cover administrative costs and another to fund programs that expand market access

The proposed securitization platform has the potential to be a very valuable asset and could bring significant savings to stakeholders by offering uniform contracts, reliable bond administration, advanced data management, and responsible monitoring.  The federal government must be adequately compensated for these services and a fee should be charged all participants to cover administrative and other costs, ensuring that the platform is self-sustaining and does not depend on congressional appropriations.

Insuring access to affordable and sustainable mortgage credit must be a primary goal of any reform effort the Group says and proposes the creation of a Market Access Fund to help test new products and promote access for traditionally underserved populations. The fund could be capitalized through an assessment on all mortgage-backed securities issuances with a separate, small strip on all mortgages bundled through the platform.

4.   Adopt strong, loan-level disclosure requirements for the mortgage-backed securities market

To avoid repeating the hidden risks that led to problems during the housing bubble the future market must have available more granular and reliable information on product pricing and loan-level risk.  The group commends FHFA for proposing more robust security- and loan-level disclosures as part of the securitization platform, and urges loan-level disclosures whenever feasible and that they be available to the first-loss entity at the time of or as soon as practically possible after delivery of the security.

The Group also recommends that information on borrower race, gender, nationality, and geography be collected and that regular reports eventually be made available at no cost to the public or at least to researchers upon request. This will help regulators, researchers, and concerned citizens track whether market participants are creaming, discriminating, or otherwise denying mortgage credit to certain creditworthy borrowers.

5.   Ensure that the new infrastructure can facilitate advanced loan monitoring and loss-mitigation activities

When FHFA rejected the Treasury Department's offer to help pay for principal reductions on Fannie- and Freddie-backed loans it cited system limitations as a key factor. Many of the systems related to these operational complexities will be revamped as part of the proposed securitization platform and since the agency is already planning to make these investments, it should devote any additional resources necessary to addressing the aforementioned system and operational limitations, with a particular focus on loss mitigation.

Administrative burden should no longer be able to serve as an excuse for neglecting critical foreclosure prevention activities. The proposed platform is a promising opportunity for the agency to take steps to meet its stated conservatorship goal to "maintain foreclosure prevention activities and credit availability for new and refinanced mortgages."

In conclusion, we believe that the Federal Housing Finance Agency is on the right path with its plan to establish a single securitization platform, and we appreciate the agency's stated goal to design a platform that is "consistent with multiple states of housing finance reform" and "capable of working well with or without various degrees of government involvement." It is crucial for the Federal Housing Finance Agency to continue to involve a broad range of stakeholders as the process moves forward.