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Wells Exec Testifies About Replacing Fannie, Freddie

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A top executive for the nation’s biggest mortgage lender testified that the government-sponsored enterprise model used with Fannie Mae and Freddie Mac should be replaced by a new model that supports several secondary players. Part of his proposal involves the Government National Mortgage Association.

Fundamental problems exist in the GSE model such as the inadequate regulation that enabled excessive leverage and loan portfolios that were too big, according to prepared testimony given Wednesday by Wells Fargo Home Mortgage co-president Michael J. Heid on behalf of the Housing Policy Council of the Financial Services Roundtable. The council represents 30 leading national mortgage finance companies.

Heid, who is the chairman of the council, was speaking before the House Financial Services Committee at the hearing, The Future of Housing Finance — A Review of Proposals to Address Market Structure and Transition. With $420 billion in residential originations last year, Wells Fargo was the biggest residential lender in the country.

The executive noted that the Dodd-Frank act intends to address GSE flaws by aligning the interest of all stakeholders, adding that “stronger underwriting standards and risk retention requirements will make the abuses that occurred in the past unlikely to be repeated.”

The council, according to Heid, proposes to pass on Fannie’s and Freddie’s credit enhancement or guarantee functions to a handful of “mortgage securities insurance companies,” or MSICs. He said four to eight MSICs would be federally chartered and supervised like federally regulated financial institutions.

“The greater the number of MSICs, the better insulated the housing finance market would be from the failure of any one MSIC,” he stated. “On the other hand, too many MSICs — with different underwriting systems and procedures — could be overly burdensome to lenders, particularly smaller lenders.”

While no federal backing of the entities would be provided, an explicit federal guarantee would be provided for mortgage-backed securities issued by the MSICs. Principal and interest owed to investors from MSIC MBS would be guaranteed, and issuers would pay the government a guarantee fee that is placed in a reserve. MBS would be exempt from SEC registration requirements.

Heid explained that the government guarantee would be shielded by borrower down payments, private mortgage insurance and shareholder equity in the MSICs. In addition, reserves would be established from the guarantee fees.

If, after exhausting each layer, the government has a loss, the group supports the imposition of a special assessment on MSICs — much like occurs with the Federal Deposit Insurance Corp. and the banks it insures. The Federal Housing Administration and Ginnie Mae were cited as models for maintaining a “budget-neutral” position for the government.

The council proposes that banking organizations “of all sizes” be authorized to invest in MSICs — though investment wouldn’t be mandatory.

“We also have tried to gauge the interest of other potential investors,” the testimony said. “We have been told that investors would be interested in capitalizing MSICs as long as they could achieve a ‘reasonable’ return on their investment and that the relationship between MSICs and the Federal Government was clear and unchanging.”

A “world-class regulator” would establish underwriting and capital standards. Investment portfolios would be prohibited, though small portfolios could be maintained to warehouse newly developed products and multifamily loans before securitization, purchase whole loans from small banks and execute loss mitigation and REO disposition.

A proposed single MBS securitization facility would provide administrative MBS services and handle functions like those handled by FHA and Ginnie. The statement said Ginnie should be tapped to perform the services of the facility either directly or on a contract basis.

Heid said the disparity that exists today between Fannie and Freddie on MBS repayment characteristics should be eliminated and a single MBS standard should be adhered to.

“A single MBS does not mean that all MBS would be composed of the same type of mortgages, only that the basic legal structure, terms and conditions governing repayment and other administrative features of the MBS would be the same,” he explained. “MBS backed by MSICs could be composed of loans from a single lender or multiple lenders allowing lending institutions of all sizes access to this liquidity.”

The council also proposes to pass on the responsibilities for supporting affordable housing from the GSEs to the MSICs. The new entities would set aside 4 basis points on acquired mortgages annually, like the GSEs do now. However, no affordable housing goals should be used.

Heid laid out a number of factors to be considered in a possible transition from the GSEs to MSICs and said the flow of mortgage capital must continue uninterrupted during the process.

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