Housing finance should be reformed by creating chartered mortgage institutions that would provide investors in mortgage-backed securities a payment guarantee on principal and interest, says a new white paper on mortgage reform.
The CMIs, regulated by a federal agency, would be private institutions neither owned nor controlled by originators. They would keep a middle market functioning, the paper said.
The new proposal for reforming the housing finance market comes from the “Mortgage Working Group” — 19 university scholars and housing advocates convened by the liberal-leaning Center for American Progress. The center posted the proposal to its website on Thursday.
Revamping Fannie Mae and Freddie Mac have been the focus of much debate lately, with different groups suggesting various methods to reform the government-sponsored enterprises, which were put into conservatorship during the financial crisis. The Treasury is expected to reveal its proposal in February.
In a recent interview with HousingWire that will appear in the February magazine, Janneke Ratcliffe, a member of the Mortgage Working Group, said securities would be backed by a catastrophic risk insurance fund, run by the government but funded by premiums on CMI-guaranteed MBS. The fund would provide an explicit guarantee of CMI’s obligations.
“The CMIs would simply be doing the default risk protection function that the GSEs do now,” Ratcliffe said.
The Mortgage Working Group believes there is room for the Federal Housing Administration to provide affordable housing and a pure-private market for affluent borrowers where government guarantees aren’t needed. But for the middle market, a catastrophic guarantee is needed for investor involvement in the housing market, Ratcliffe said.
“Without that catastrophic guarantee, you can look now and see that if there isn’t a government guarantee, there isn’t much activity,” said Ratcliffe, who is also associate director of the Center for Community Capital at the University of North Carolina.
Said the paper: “In short, we need a new system that is capitalized with as much private capital as possible while still serving the nation’s housing needs. Any government guarantee must be explicit and paid for; we must avoid a repetition of the uncompensated implicit government guarantee that backed Fannie and Freddie before they collapsed into government conservatorship.”
To protect taxpayers and ensure that all requirements for the guarantee are met, the federal government also would regulate the CMIs for capital adequacy and compliance with consumer protection and other responsibilities. The government would serve as conservator or receiver for CMIs that fail, with responsibilities that include ensuring that the servicing of the remaining guaranteed securities is carried out by a qualified entity.
Providing a government guarantee against catastrophic risk is expected to raise mortgage rates on a 30-year fixed-rate mortgage by around 0.5 percentage points, the paper said.
The group also proposes the creation of a market access fund, financed by a small fee on all mortgage-backed securities. The fund would, on a competitive and shared-risk basis, provide credit enhancement and research-and-development funds to promising but untested mortgage finance products that could better serve underserved markets, according to the white paper.
Market access fund credit enhancements, unlike Federal Housing Administration guarantees, would back only a portion of the risk of a loss and would be available only for a limited period.
"The fee on all mortgage-backed securities would also fund the National Housing Trust Fund and the Capital Magnet Fund, two funds that provide finance to states and community development financial institutions primarily to support affordable rental housing, and which were to have been funded by Fannie Mae and Freddie Mac before they fell into conservatorship," the paper said.
Incremental shifts in GSE status, not wholesale changes, are most likely this year, Ratcliffe told HousingWire.
“It’s unrealistic that we will rip the Band-aid off and have a whole new secondary market structure put in place in 2011,” she said. “That would be irresponsible and dangerous.”
Write to Kerry Curry.
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