Congressional gridlock has halted high-level reform of Fannie Mae and Freddie Mac, but that should not stop policymakers from addressing the future of the government sponsored enterprises, the head of the Mortgage Bankers Association said Monday.
"In the absence of a legislative initiative, we believe steps need to start now," MBA president David Stevens said during a press event at the trade group's annual secondary market conference. Stevens called for increasing the transparency of the GSEs' oversight, making their securities interchangeable, and allowing private mortgage insurers a greater role in the market.
One problem is how the Federal Housing Finance Agency, the GSEs' conservator, is overseeing them. The agency's decision-making has proven opaque, Stevens said, preventing other stakeholders from coordinating their actions.
"FFHA is acting as if they have no obligation in their own mind to follow a process and think about interactions with the other regulated entities," Stevens said. The complaint extends beyond mortgage industry groups, Stevens said, adding that the MBA plans to co-author a statement for greater FHFA and GSE transparency with "major consumer groups."
The government could also be doing more to expand the role of private guarantors following the collapse of the private securitization market, Stevens said. Although the GSEs' have raised the fees they charge for guaranteeing home loans, they still haven't left much room for private insurers.
One way to minimize the GSEs' position in the market would be to allow private insurers to take on more credit risk. If mortgage insurers were allowed to take on more risk than the 20% exposure that is standard — for example, by insuring loans against losses of up to 40% — the GSEs could become more of a catastrophic insurer than a frequent taker of credit risk.
Mortgage insurers "have been a punching bag for a whole bunch of reasons, but they survived better than the GSEs did," he said. "Private capital believes it can [beat] the price the GSEs are charging for the same risk."
Stevens contrasted the role mortgage insurers would play in insuring loans with suggestions that the GSEs insurer themselves through other credit structures, effectively laying off a portion of the risk of their portfolio. Consumers would benefit from the former, he said, because private insurers would compete up front on price.
"When they [reinsure] on the back end, all it does is become a secondary market," Stevens said. "There's no benefit to the consumers."
Risk sharing need not be limited to the large mortgage insurers, Stevens said, noting that a possible market exists for smaller banks and servicers to retain some exposure to loan originations.
Finally, Fannie and Freddie securities have long been treated differently by the market, and Stevens said the industry would benefit if the GSEs were better aligned and their securities were more interchangeable.
"We're trying to avoid having to say that we need to wait for legislation," Stevens said.