Federal Housing Finance Agency Acting Director Edward DeMarco sent a plan to Congress on how to fix the nation's mortgage finance market. His solution is to build a completely new infrastructure for the secondary market while contracting activities at the government-sponsored enterprises, Fannie Mae and Freddie Mac.
"No private sector infrastructure exists today that is capable of securitizing the $100 billion per month in new mortgages being originated," said DeMarco in a letter to Congress. "Simply shutting down the enterprises would drive up interest rates and limit mortgage availability."
Mortgage bonds, both private and nonagency, trade regularly on the secondary market. DeMarco's letter indicates that the lack of new private-label, residential mortgage-backed securities is what is missing in a robust housing recovery.
"The absence of any meaningful secondary mortgage market mechanisms beyond the enterprises and Ginnie Mae is a dilemma for policymakers expecting to replace the (GSEs)," the letter states. "Without an alternative market infrastructure that investors could rely on, new mortgages would have been largely unavailable if the Enterprises suddenly had been shut down."
This new market should be entirely transparent, the FHFA states. Mortgage servicers and bond investors should be able to access information on borrowers and be able to directly track collateral performance. Current pooling and servicing agreements are woefully inadequate and need to evolve, the agency also states, without offering more specifics.
Furthermore, mortgage servicers require more attention, in such a way that competiton is fostered, not hindered. For example, the new secondary market should "take full account of mortgage servicers’ costs and requirements, and consider the appropriate interaction between origination and servicing revenue."
Home preservation initiatives also factor high in the DeMarco plan, as is compensation for the chief executives of the GSEs. The letter states that the GSEs are unlikely to fully repay taxpayers for $180 billion in bailout funds.
Therefore, it is time to move on to the "next chapter," according to DeMarco.
The plan, which is more of a broad guideline by its own admission, urges policymakers to get serious about reforming the current secondary markets aways from the GSEs and into this new vision for a stable private market.
"Without further statutory direction, FHFA views the mandate to restore the enterprises to a sound and solvent condition as best accomplished not only through aggressive loss mitigation efforts, but also by reducing the risk exposure of the companies, through appropriate underwriting and pricing of mortgages," the letter states. "Such actions are consistent with what would be expected of a private company operating without."