About the only common theme in the letters is the utter lack of consensus among various players. In the nearly two years since the government seized Fannie Mae and Freddie Mac, the coming debate promises to be a black hole.
The proposals range from abolishing Fannie and Freddie to nationalizing them, creating a mortgage insurance fund to back mortgage-backed securities or just returning the GSEs to the way they were before the crisis. Other suggestions included creating a covered bond market to allow banks to issue mortgage-backed debt to finance loans, or allowing each of the 12 Federal Home Loan banks to securitize loans.
The disparity found in the letters is likely to be echoed in a GSE conference the administration is planning for Aug. 17, which will feature academics, industry groups, consumer representatives and others.
In announcing the conference on Tuesday, the administration reiterated its commitment to deliver a plan to Congress by January. But what plan ultimately takes shape is far from clear.
"The federal government faces a difficult balancing act in supporting a stable, well-functioning mortgage market," wrote John Gibbons, executive vice president of capital market at Wells Fargo Home Mortgage. "On the one hand, it must ensure a stable flow of mortgage credit in a variety of economic environments, which generally requires some sort of government guarantee. At the same time, it must ensure that housing prices are sustainable, and do not get out of line."
Wells threw its weight behind a proposal from the Mortgage Bankers Association and other organizations that calls for the creation of a small number of federally chartered privately owned mortgage conduits. Those companies would buy loans from the primary market and deliver them into a federally guaranteed mortgage-backed security.
In exchange for that guarantee, the conduits would pay a risk-based fee that would be used to establish an insurance fund, similar to that of the Federal Deposit Insurance Corp.
"The specific framework that we propose addresses the major weaknesses of the GSE model while preserving most of its benefits," Gibbons wrote. "It reduces moral hazard by guaranteeing the conduit's MBS but not its debt, and removing most of the charter advantages heretofore afforded to the GSEs."
He added that the "private conduits — and not the federal government — would assume the credit risk on the underlying mortgages. The federal guarantee would only come into play in the event that the conduit failed, putting the conduits' equity holders and creditors first in line for any losses."
The so-called mortgage credit guarantor entities would hold only a minimal mortgage portfolio, unlike Fannie and Freddie, which ultimately collected portfolios worth well over $1 trillion.
In the MBA's letter, John Courson, the group's president and chief executive, and Michael Berman, its chairman-elect, wrote that the number of conduits could start small but expand as the market grows.
"Initially, we would expect the number of MCGEs to be two or three," they wrote. "The regulator would have the ability to increase that number, through the granting of charters, as the market develops. Intense competition along a number of dimensions would benefit borrowers and the market as a whole. The market would also benefit from standardization of the MBS structure, so that investors can easily compare security offerings across MCGEs."
