WASHINGTON — The Federal Housing Finance Agency on Thursday released a proposal to create a framework for a new secondary mortgage market.
The agency previously announced its intent to develop and finalize a plan for a single securitization platform that would meet the needs of the two mortgage government-sponsored enterprise and a post-conservatorship market with a variety of future issuers.
FHFA's goal is to be able to replace the outdated infrastructure at Fannie Mae and Freddie Mac with a much more efficient model — one that will invite participation of private capital.
"Success in achieving these goals will provide a sound, efficient and flexible operating environment in the shorter term, and help provide policymakers with the means to design a mortgage finance system unfettered by legacy processes and systems and capable of working well with or without various degrees of government involvement," the agency's 32-page proposal states.
The agency says it plans to follow an incremental approach in building a future securitization framework, starting with very basic principles and later improving on its scope following feedback from the industry, other regulatory agencies and decisions from policymakers. The public comment period closes on Dec. 3.
"The release of this white paper is an important step in laying the groundwork for the future structure of the housing finance system," said Edward DeMarco, acting director of the FHFA, in a press release. "Given that the securitization infrastructure could serve as a utility that would outlast Fannie Mae and Freddie Mac as we know them, we look forward to public input from all market participants and interested parties."
FHFA says upgrading the "existing and inflexible enterprise infrastructures" is necessary in order to have an efficient flow of mortgage credit. Additionally, the agency stressed any transition to a new securitization framework would also require a more flexible infrastructure to accommodate future policy decisions.
Currently, the secondary mortgage market is made of three models for securities issuance: the two GSEs, Ginnie Mae and private label. Since the financial crisis of 2008, private label issuance has shrunk dramatically. Today, roughly 75% of mortgage securitization is performed by the two enterprises in conservatorship, while the other roughly 25% is performed by Ginnie Mae.
The FHFA named the key elements that would be required in a housing finance system regardless of its future outcome, namely "an operational mechanism that connects capital market investors to borrowers by bundling mortgages into securities and tracking payments."
It would also be useful to have a standardized pool and servicing agreement that replaces parts of the enterprises' contractual architecture and addresses shortfalls in the private label agreements.
In its paper, the agency outlined key principles critical to the success of a functional secondary mortgage market, like promoting liquidity, attracting private capital, benefiting borrowers and operating flexibly and efficiently while minimizing market disruption during transition.
"The goal is to offer benefits to the broader housing finance market, while not limiting market choices or valuable independent innovations," the paper stated.
The securitization platform, the agency stressed, should be able to maintain secondary market liquidity, while also enabling the entry and participation of private capital. It should also support the distribution of credit risk to the private sector through various risk sharing agreements.
"The envisioned platform would bundle mortgages into any of an array of securities structures and provide all the operational support to process and track the payments from borrowers through to the investors from the time a security is created until its ultimate payoff," the paper stated.
Separately, a new pool and servicing agreement would leverage the existing structure used by the enterprises, and would include a short PSA containing lender/seller specific requirements and variances, and general trust provisions. It would also incorporate robust program guides, which would set out the requirements for underwriting, disclosure, servicing and loan delivery.
Such guides, the agency said, would put into place minimum standards for eligibility to use the proposed industry securitization platform, specify the duties and responsibilities of the platform, and form as a set of "best practices" and regulatory requirements.