Step one: MBA reveals proposal to reform Fannie Mae and Freddie Mac

The beginning principles and guardrails to guidance

The largest trade group in the mortgage finance space, the Mortgage Bankers Association, released its initial plans for its recommended approach for secondary mortgage market reform, unveiling the first product from its recently formed “task force,” which is made up of some of the top lenders and insurers in the industry.

The paper is a first look at the MBA’s plans for ending the conservatorship of Fannie Mae and Freddie Mac, the government-sponsored enterprises, with the full paper anticipated to come in April.

Under the MBA’s plans, the entities’ purpose would be to provide sustainable credit availability to the conventional single family and multifamily mortgage market and provide equitable access to lenders of all sizes and business models.

Two of the main principles under the plans include:

  • The 30-year, fixed-rate, pre-payable single-family mortgage and long- term financing for multifamily mortgages should be preserved.
  • A deep, liquid TBA market for conventional single-family loans must be maintained.

A big difference between today’s model and the MBA’s proposed plan is the government guarantee would only be for the securities and not the entities issuing them. 

The guarantors would be organized as privately-owned utilities with a regulated rate of return. Guarantors could purchase from a newly created insurance fund an explicit federal guarantee on a defined class of eligible securities, the plans stated.

Also, Fannie and Freddie will have some new competition since the plans allow one or more new entrants to compete with the reformed GSEs. All future entities would have the same purpose and responsibility to address underserved markets nationwide and ensure broad access to credit.

By keeping the explicit guarantee of the mortgage-backed securities, it would insure the timely payment of principal and interest in the event one or more of the guarantors failed during a crisis and became unable to remit scheduled pass-through payments to investors.

These changes won’t happen overnight though. The MBA stated the transition should occur over several years, with implementation occurring gradually to avoid market disruption and to build required capital. The transition should also easily allow new entrants to develop as soon as possible in order to encourage competition.

"Today’s paper is intended to provide thoughtful recommendations on how to reform the GSEs while ensuring a healthy, robust secondary mortgage market emerges for both single-family and multifamily mortgages,” said Rodrigo Lopez, executive chairman of NorthMarq Capital and chairman of the MBA.

“The U.S. mortgage market requires global capital in order to maintain adequate liquidity through all economic cycles,” continued Lopez. “International and institutional investors will only fill that role if there is an explicit government guarantee on the securities, something that can only be obtained by congressional action.”

As it stands, GSE reform is a priority for the Trump administration. However, the way this will be done is still unknown.

During his confirmation hearing, Steve Mnuchin, the Trump administration’s choice to lead the Department of the Treasury, said, “We need housing reform. We shouldn’t leave Fannie and Freddie alone for the next four or eight years without reform.”

Previous comments from Mnuchin about removing Fannie and Freddie from conservatorship led some to question whether Mnuchin (and therefore the Trump administration) supported the “recap and release” of Fannie and Freddie, a plan in which Fannie and Freddie would be allowed to rebuild their dwindling capital buffers, followed by releasing them from their current state of conservatorship.

However, Mnuchin clarified this during his hearing saying, “My comments were never that there should be recap and release. For long periods of time, Fannie and Freddie were well run and did not create risk to the government. I believe there are very important entities."

That doesn’t mean that Fannie and Freddie should be left to their own devices, Mnuchin said.

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