The head of the Mortgage Bankers Association has proposed a single security for Fannie Mae and Freddie Mac, lower guarantee fees for sellers with a bigger risk appetites, and more input from lenders on secondary marketing rulemaking.
MBA President and Chief Executive Officer David H. Stevens took a jab at policy makers who use guarantee fees to fund unrelated budget shortfalls.
He identified today’s biggest challenges as “the collective weight of change, the lack of any leadership in a future model for housing finance, and lack of coordination.”
Stevens made the comments at the trade group’s 2013 Secondary Market Conference and Expo in New York, according to a copy of his prepared transcript.
He warned about the lack of an exit plan for Fannie Mae and Freddie Mac, which have been operating in conservatorship for more than four years. While acknowledging both companies’ contributions to the economy during the financial crisis, Stevens said it is time to replace government funding with private capital while maintaining a government backstop for times of stress.
Stevens cautioned those who wonder whether fat recent profits at Fannie and Freddie are an indication of strength for an ongoing business model. He explained that they’ve been able to more than double guarantee fees in recent years despite acquiring one of the safest books of business in history. He noted that the wave of refinances was brought on by government programs like the Home Affordable Refinance Program, and he added that the Federal Reserve has been holding rates to historic lows through its quantitative easing strategy.
Stevens warned about the opaque policy changes happening at the government-sponsored enterprises like changes to minimum net worth requirements, G-fee changes and volume limits for some existing sellers. They have also issued new servicing rules, a new framework for representations and warrantys and changes to their securitization platform.
He called for GSE reform legislation, and said it would be easier to transition form the current GSE system to a potentially new system while the market is liquid versus down the road when refinances dry up.
Stevens called for President Obama to name a housing policy coordinator, demanded absolute transparency in the GSE rulemaking process and proposed a clear path to transition out of conservatorship.
The latter will be helped with the creation of a single security for Fannie and Freddie. MBA has reportedly been at the forefront advocating modified Freddie Mac participation certificates to mirror the exact structure of the Fannie Mae mortgage-backed securities. MBA also wants these securities to be considered fungible for to-be-announced delivery.
“On a typical day, ten times as much Fannie Mae MBS trade relative to the much less liquid Freddie PC security,” Stevens said. “By making the MBS the common currency for both agencies we can enhance liquidity, reduce costs to taxpayers, and begin to lay the groundwork for a more competitive and efficient secondary market.”
The transition to a “common currency” raises investor concerns about liquidity differentials and defaulting to the cheapest security to deliver swap costs and covering the cost. But the concerns can mitigated and controlled with swift action.
The transition out of conservatorship will also happen with additional risk share by mandating Fannie and Freddie to accept lower guarantee fees for deeper credit enhancements/
In addition, Stevens called for the redirecting of the FHFA platform initiative.
“Endless conservatorship is not a sustainable option nor is returning Fannie and Freddie back to their original state,” Stevens concluded. “We believe in a strong secondary market built on private capital with a limited government guarantee to ensure liquidity in all market conditions.”
