Despite whatever changes face the US mortgage finance market and the government-sponsored enterprises (GSEs) Fannie Mae (FNM)
and Freddie Mac (FRE)
, the government has an important role to play in backing mortgage origination and securitization, according to expert testimony provided to the House Financial Services Committee today.
The GSEs played an essential part in supporting affordable housing in the absence of a private mortgage market, US Department of Housing and Urban Development
(HUD) secretary Shaun Donovan told the Committee. He noted the GSEs did so in a sustainable fashion -- contrary to criticism that affordable housing goals forced an expansion
into high-risk loans, exposing the GSEs to financial weakness.
Additionally, Donovan said the GSEs have emerged as major providers of multifamily financing. This element of housing finance should not be overlooked, he said, echoing earlier comments from Committee chairman Barney Frank (D-MA)
that there should be a focus going forward on preserving affordable rental housing.
"A well-functioning rental market will be particularly important in the immediate future, as rental markets will absorb a larger-than-usual number of families who owned homes during the bubble but will be renting in the near future," Donovan said in prepared remarks (download here
Other committee members stressed that a future mortgage finance system should be based on private investment, which largely evaporated with the economic downturn. Donovan said that, although investors may be hesitant to buy new securities, securitization markets are beginning to heal.
"We are hopeful with our efforts to try to bring the private market back," he told the Committee. "We do see early signs of that beginning to happen."
The market saw its first commercial mortgage-backed securities (CMBS)
deal since the credit freeze, and Donovan said he expects Redwood Trust (RWT)
to issue the first batch of residential mortgage-backed securities (RMBS) as early as next week. A spokesperson for Redwood declined to comment.
To support the future of securitization, Anthony Reed, executive vice president of capital markets at SunTrust Mortgage
, testifying to the Committee on behalf of The Financial Services Roundtable
, urged the formation of a federally chartered but privately-owned Mortgage Securities Insurance Companies (MSICs) to provide credit enhancement.
He also proposed a single Mortgage Backed Security (MBS) Issuance Facility to create and administer MBS guaranteed by the MSICs. Additionally, he said MSICs should contribute a stream of revenue to be distributed to state and local housing finance agencies.
Sheila Crowley, president and CEO of the National Low Income Housing Coalition, recommended that Congress provide an initial $1.06bn of capital to implement the National Housing Trust Fund, which can be afterward funded in part by fees levied on mortgage securitization by capital markets participants.
Crowley also recommended reforming the mortgage interest deduction, and enacting a federal rent credit to provide low-income renters with a housing subsidy similar to those given to homeowners.
"Consider how much worse our economy would be if we had not had Fannie and Freddie over the past 18 months," she said. "Federal backing in some form or fashion will be required to sustain such a secondary mortgage market."
Alex Pollock, resident fellow at the American Enterprise Institute
, proposed structuring "a transition to a world of no GSEs." This post-GSE market would be protected by some form of credit risk retention by originators, he sad.
"You can be a private company, with market discipline; or you can be part of the government, with government discipline. But you can’t be both," Pollock said. "Trying to be both, in other words, a GSE, means you avoid both disciplines. Fannie and Freddie, or parts of Fannie and Freddie, should become one or the other."
Write to Diana Golobay
Disclosure: the author holds no relevant investment positions.