All the buzz on Capitol Hill is trying to find various outlets to bring private capital back into the mortgage market that benefits both taxpayers and consumers.
One way to entice investors back into the market would be for the Federal Housing Finance Agency to require Fannie Mae and Freddie Mac to offer risk-sharing options to lenders at the ‘point of sale’ rather than on the back-end after loans have been delivered to the enterprises, the Mortgage Bankers Association outlined in its latest white paper.
"By requiring the GSEs to offer programs such as up-front risk sharing between lenders and the GSEs, the FHFA would be taking a big step in the right direction," said David Stevens, president and CEO of the MBA.
He added, "Ultimately, this would put private capital, not taxpayers, in the first-loss position and would allow lenders of all sizes to compete, driving down costs for borrowers."
The risk sharing options would offer deeper private credit enhancements to the enterprises in exchange for fees charged to borrowers and lenders.
Additionally, the risk sharing should happen at the front end of the transaction and not just at the back end.
The goal of the new structure would be to bring tangible benefits to consumers by increasing access to credit and encouraging competition among private lenders, investors and credit enhancers by driving down costs at the point of entry.
"MBA's risk sharing concept is one part of a series of actionable steps that FHFA can take to help draw private capital back into the mortgage market while policymakers and other stakeholders continue the debate over the future of Fannie Mae and Freddie Mac," said Debra Still, chairman of the MBA.
She added, "MBA also has convened a task force of industry participants who are working on what the industry thinks the end state on the future of the secondary mortgage markets should look like and the pathway forward. This risk share proposal aligns with the task force's thinking on the components of important first steps."
There are various concerns that remain in regards to this transaction plan, including over-reliance on the mortgage insurance industry that is still recovering from the downturn.
However, the MBA argued that any form of private credit enhancement is at risk of failure, but unlike the GSEs they will not be bailed out by the taxpayer.
Meanwhile, other analysts have questioned whether Fannie Mae and Freddie Mac would be willing participants in this initiative.
The fact of the matter is that both are making record profits based upon guarantee fees and may not be willing to cede such revenue in exchange for deeper levels of private credit enhancement, the white paper noted.
Nonetheless, the MBA believes FHFA should require the GSEs to offer a front-end risk-sharing program as part of the conservator’s goal of contracting the dominant footprint of the enterprises in the mortgage market.
Overall, by allowing other private credit enhancers to play a more beneficial role at the front end of the transaction, the advantages of increased competition and private capital will be delivered to both taxpayers and consumers.
"This initiative would open another channel for that return, and would at the same time complement and support FHFA’s initiative to contract the GSEs’ current dominant presence in the mortgage market, while potentially opening up additional access to credit for borrowers," the MBA concluded.