Rep. Scott Garrett (R-N.J.) proposed his idea of a future mortgage market Thursday, one with new underwriting standards and transparency but without Fannie Mae, Freddie Mac or the upcoming risk-retention rule. “My proposal to reform the secondary mortgage market will facilitate continued standardization and uniformity, ensure rule of law and legal certainty, and provide investors with the standardization and transparency necessary to ensure that a deep and liquid market develops in the absence of Fannie and Freddie,” Garrett said. The government-sponsored enterprises currently owe the Treasury Department $142 billion in bailouts, and could require another $124 billion before 2014 after subtracting the quarterly dividend payments made. However, many within the mortgage industry continue to call for some government support to keep costs down and availability up. When asked on CNBC Thursday about his hopes of getting the plan through a gridlocked Congress, Garrett said he was “optimistic.” Garrett broke out his proposal under three sections. The first would direct the Federal Housing Finance Agency to develop a series of uniform underwriting standards for different loan categories. Representation and warranty contracts, those designed to force lenders to buyback faulty mortgages should they default, will be uniform. The proposal also sets a mandatory arbitration between the investor and the issuer of a mortgage-backed security in representation and warranty cases. The bill introduced would also abolish the risk-retention provision under the Dodd-Frank Act. Federal regulators are still working on the joint rule, which as proposed would force lenders to maintain the credit risk on all mortgages except those with a 20% down payment among other requirements. The comment period ended in August. The second section under the Garrett proposal would remove conflicts of interest between servicers and investors and clarify the rules of how borrowers can obtain second leins. Servicers would also receive a standardized set of rules when account and reporting for modifications and other workouts. The final section of the proposal is mean to provide investors in the mortgage market more transparency on data. Without a government backstop, potential MBS investors have said this would be critical in order to properly fund the market to meet U.S. housing demand. The Garrett proposal requires an increase in amount of loan-level information and disclosures to investors. It would also set longer timelines investors would have before making decisions. Issuers would also be forced to disclose pricing history on securitization deals. And, each loan with a securitization would be given an individualized marker to track it along the secondary market. “Most, if not all, of my colleagues, Republican and Democrats alike, recognize the status quo is unsustainable. The government-sanctioned duopoly of Fannie and Freddie is not only systemically dangerous to our economic security, it’s un-American,” Garrett said. Write to Jon Prior. Follow him on Twitter @JonAPrior.
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