From GSE to MCGE

The mortgage industry has staked out its vision for the future of Fannie Mae and Freddie Mac, offering a formula it hopes will shape what appears likely to be a long debate over a pillar of the country's housing policy.

Under a Mortgage Bankers Association proposal announced Wednesday, the government-sponsored enterprises' infrastructure, including their "technology, human capital, standard documents and relationships," would be used to help form new mortgage insurance companies — which the trade group called mortgage credit-guarantor entities — that would be allowed to fail. A range of basic mortgage products covered by the new companies would be packaged into bonds with an explicit federal guarantee, similar to what the Government National Mortgage Association provides now. (The proposal suggests that Ginnie Mae could administer the new guarantees.)

Michael Berman, the MBA's vice chairman, said the trade group's proposal was developed with a focus on the question, "What products do we need if we have the 500-year flood and we're on Noah's ark and land on an island and we need a housing industry?" — and therefore envisions a large role for private-sector offerings in addition to government programs like mortgage insurance provided by the Federal Housing Administration.

Berman said the key tenets of the MBA's proposal involve allocating the risks of mortgage finance to the private sector, with mortgage bond investors assuming interest rate risk, and other investors assuming credit risk — shareholders and debtholders would absorb losses from missteps by the MCGEs — with the government stepping in if there is a catastrophe.

"We have a clear credit support for the securities that are being bought by the bond investors, and no support whatsoever for the MCGE's balance sheet, but heavily regulated," he said. "So the price of being a MCGE is that you're subject to heavy regulation as to your capital adequacy, the products that you'll use and the price that you'll pay."

The successor entities would retain some of the farmer accent of the Fannie and Freddie nomenclature — Berman pronounced MCGE as "McGee," with a soft g, as in George.

The Obama administration has said it intends to issue its proposal for reshaping the GSEs as part of its budget plan in February.

Berman said the MBA has had meetings with the Treasury Department, the National Economic Council and the Council of Economic Advisers, and is scheduling meetings with the Department of Housing and Urban Development, the Federal Reserve Board and both sides of the aisle on Capitol Hill.

The MBA council that formulated the proposal includes representatives from Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co.

Everybody There?

How does an executive stay in touch with 29,740 employees?

Cara Heiden and Mike Heid, the co-presidents of Wells Fargo Home Mortgage, a unit of Wells Fargo & Co., held a conference call last week to give the mortgage unit's employees a semiannual update.

"We had up to 5,000 lines into that call, with two to three people on each line," Heiden said in an interview. "We give them insight into how we're going to finish out the year strong."

Wells Fargo has been making up for lost time, she said, describing how the home mortgage unit lost market share from 2004 to 2007 because it refused to offer stated income and option adjustable-rate mortgages during the height of the housing boom.

Wells' market share is bouncing back. It jumped to 23.5% in June, up from 19.5% in 2008 and 11.2% in 2007. Of course, Wells inherited Wachovia Corp.'s massive portfolio of option-ARMs and other problem assets after buying the Charlotte company in December, with 3.5% market share.

She thinks a new buzzword for the industry should be about borrowers who are "credit-ready."

"I like that word, credit-ready, because it's important for borrowers to understand the mortgage products and options available to them," Heiden said.

Eye on Refis

The Mortgage Bankers Association said its index of refinance applications decreased 3.1% in the week that ended last Friday, as the average interest rate on 30-year fixed-rate mortgages with 80% loan-to-value ratios fell 9 basis points, to 5.15%.

Its seasonally adjusted purchase index declined 1%, leaving the share of refinancing activity unchanged at 56.5%.

The trade group's index of applications for government-insured mortgages for home purchases increased 0.5%, bringing the government share of purchase applications to 40.4% — the highest level since February 1991.

In a note to clients Wednesday, analysts at UBS AG estimated that current mortgage rates are low enough to give borrowers holding about 67% of conforming loans the incentive to refinance, down from 82% in February, when "the refi wave was starting to gather steam."

Taking into account tighter underwriting, home-price declines and poor economic conditions, the analysts estimated that 57% of the market is currently "refinanceable."

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