In an article in Fortune, Wells Fargo President and CEO John Stumpf weighs in on fixing the mortgage mess and winding down Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac. In acknowledging that the role of the GSEs need to be reduced, Stumpf suggests change in the mortgage markets need to balance risk among the players.
The secondary mortgage market, Stumpf writes was created because banks lacked the capacity to hold the amount of mortgage debt, currently $11 trillion, on their balance sheets. The goal of the GSEs was to help the secondary market function fairly and efficiently for all parties involved. However, their role has expanded and ballooned well beyond the original intention. Now the government bailout could exceed $250 billion.
Stumpf argues that winding down the GSEs and shaping the future of the secondary mortgage markets requires 3 overriding principles. First, is to require that all parties, including the homeowner share a financial interest in the quality of the loans. As the loan is created and sold, everyone associated from the originating entity to the investor should retain a level of risk for the loan. For the borrower, their financial interest comes in the form of down payment. He doesn't suggest a specific percentage that homeowners should be required to meet, but notes that it certainly needs to increase from prior standards. With risk retained and shared by all parties, Stumpf believes that long-term costs will be dramatically lower.
Second, Stumpf suggests that the on-going role of the federal government needs to be explicitly spelled out, rather than implicit. If GSE loans are to have an explicit backing of the federal government, then the private capital reserves should be sufficient to mitigate the risk of loss. This, in effect, would leave the government as a backstop in the event of "catastrophic loss," similar to the way the FDIC protects bank deposits.
Lastly, standardization of underwriting and servicing standards needs to be uniform for mortgage loans. Stumpf states that efficiency in the secondary market requires "relatively standard products and processes" to create relative consistency in the quality of secondary market securities.
Stumpf sees significant change in the mortgage markets as necessary to improve the stability and availability of sufficient mortgage capital and believes that solutions can be found to balance the needs of market participants while mitigating the level of risk to avoid another market meltdown.