A new class of mortgage-backed securities proposed to lawmakers would be guaranteed by the government.
The proposal was made in testimony today before the House Financial Services Committee by Mortgage Bankers Association Chairman-Elect Michael D. Berman, according to a copy of his prepared transcript. Berman was speaking at hearing entitled, Housing Finance: What Should the New System Be Able to Do?
Berman acknowledged that the secondary mortgage market should be funded with private capital. But he also acknowledged the need for uninterrupted mortgage financing.
He called for a new MBS class that would be backed only by “core” single-family and multifamily products. The government would provide an explicit credit guarantee on the securities, though the guarantees would be financed with risk-based fees.
“Each security would have two components: a security-level, federally-guaranteed ‘wrap,’ which would be backed by loan-level guarantees from privately-owned, government-chartered and regulated mortgage credit-guarantor entities,” Berman explained. “Taxpayers and the system should be protected through limits on the mortgage products covered, limits on activities, limits on portfolio size and purpose, strong risk-based capital requirements, and risk-based payments into a federal insurance fund.”
He compared MBA’s proposal to guarantees by Ginnie Mae of timely interest and principal payments to bondholders that explicitly carry the full faith and credit of the U.S. government.
The companies backing the proposed securities would be private, and their investors would accept the potential risk of failure and loss. MBA recommends chartering enough such entities so that no one is too big to fail and the secondary market remains “truly” competitive. Initially, at least two or three charters should be given.
If Fannie Mae and Freddie Mac are to receive the proposed charters, mortgage bankers say the two government-controlled enterprises can start now by narrowing the range of mortgages they buy and winding down their portfolios.
“Additionally, the use of a good bank/bad bank strategy would help retain the best people, processes, and infrastructure from the GSEs,” Berman stated. “Identifying a clear path forward will remove uncertainty and ensure that the GSEs’ resources are of service now and in the future.”
