Government authorities are examining the secondary mortgage market to determine all the elements needed to make it run successfully.
The United States Senate Committee on Banking, Housing & Urban Affairs met this week to conduct a hearing titled, "Housing Finance Reform: Essential Elements of a Government Guarantee for Mortgage-Backed Securities". The goal was to reveal all the items needed to maintain balance in the secondary mortgage market.
"The Mortgage Bankers Association recognizes that a successful secondary market needs to be more stable and competitive for all lenders with greater protections for borrowers and taxpayers," said David Stevens, president and CEO of the MBA.
"This system would utilize familiar and operationally reliable business systems, processes, and personnel from the current GSE model," he added.
Key elements that Stevens outlined include: ensuring access to secondary mortgage market programs, preserving important GSE assets, promoting liquidity, providing consistent offerings of core products and more.
On the other side, Michael Canter, director of securitized assets with AllianceBernstein on behalf of the Securities Industry and Financial Markets Association, highlighted in the hearing the importance of the preservation of the 30-year, fixed-rate mortgage.
"Such 30-year mortgages, however, present significant risks to lenders and investors in that the stream of interest income is locked in over a long period, regardless of where funding costs move," Canter said.
"To manage this risk, lenders need access to a liquid, forward market for mortgage loans," he added.
As a result, Canter said that the preservation boils down to the TBA markets, which provide liquidity and a forward market for the trading of MBS.
Meanwhile, Phillip Swagel, former assistant secretary for economic policy at the Treasury Department, believes that having an explicit government guarantee is a better policy than the alternative of not having one.
Swagel explained that any government guarantee creates a moral hazard but the real question is how to best structure the government's involvement.
Key decisions in the design of the guarantee for Swagel include: switching the guarantee to MBS rather than entities, ensuring high-quality capital, having a 10% capital requirement and more.
Similarly, Joseph Tracy, with the Federal Reserve Bank of New York, also said that regulators cannot eliminate the risk that the government may have to intervene, creating the need to establish a system that buffers for the risk.
"I think the TBA market will be key to ensuring Americans' continued widespread aces to the 30-year fixed-rate mortgage," Tracy said.
"Ensuring an easy, predictable path to securitization of standardized mortgage products is essential to making mortgage credit available throughout our country-in traditionally underserved rural areas and urban areas, and to all sorts of current and potential homeowners, provided by financial institutions of different sizes in different locations," Tracy added.