A recent op-ed confirms what those of us who advocate for comprehensive reform of the government-sponsored enterprises as a means to build a long-term, sustainable housing finance system have long believed: Many calling for the recapitalization and release of Fannie Mae and Freddie Mac would do so without an explicit government guarantee.
This would decimate the ability of community banks and smaller lenders to participate in secondary mortgage market and likely drive many of them out of the mortgage business.
Let’s rewind for a moment. What is the key public policy objective regarding Fannie Mae and Freddie Mac? To create a stable secondary mortgage market that will provide sustainable, low-cost credit to qualified borrowers, avoid taxpayer-funded bailouts and efficiently utilize private capital. This is what the Mortgage Bankers Association and our numerous members, both large and small, are hoping to achieve.
MBA has long advocated for an explicit government guarantee on the securities. This would level the playing field and allow smaller institutions to compete with larger banks who have deep balance sheets to back their investments. It would also allow smaller lenders to offer competitive rates, benefiting consumers directly, because outside investors would have confidence that the loans are ultimately backed by the U.S. government, thus increasing liquidity in the secondary mortgage market.
Additionally, MBA believes the explicit government guarantee should not be extended to the guarantors responsible for issuing the securities. Any government guarantee for the guarantors is nonsensical and would only harm taxpayers. Simply put there is no reason to back their corporate debt or equity.
However, moving from an implicit guarantee of the two companies to an explicit guarantee on the securities will provide catastrophic insurance for those securities. This in turn should provide a more stable and liquid market and lower risk to taxpayers.
The other undeniable benefit of the explicit guarantee is the preservation of the 30-year, fixed-rate, single-family mortgage. And to preserve this, there must be a deep, liquid to-be-announced market for securities backed by conventional single-family loans. This will attract global capital that will preserve liquidity during times of economic stress. We do not believe investors would accept a return to a system that assumes an implicit guarantee, where they did not know whether or not there was an ultimate government backstop behind agency mortgage-backed securities. That is why all credible plans propose a fully paid for explicit guarantee on the securities.
This issue is one of many MBA has looked to address in the GSE reform debate. In fact, any new system must work within certain guardrails and protections intended to address risks to taxpayers, consumers and the stability of the housing finance system. This includes structural requirements to govern the framework for the new system; prudential standards that protect taxpayers; and market conduct regulations that maintain transparency and ensure a level playing field.
As Congress has engaged in GSE reform of late, MBA has proudly worked with key stakeholders and elected officials to ensure any legislation addresses the needs of all sized lenders. To that end we remain vocal that the draft discussion text from Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., on GSE reform is an important step in this overall discussion.
Moreover, MBA and over 160 lenders, almost all small or mid-sized, recently signed an open letter to Congress emphasizing the need for comprehensive secondary mortgage market reform and encouraging legislators to adopt a guarantor-based model for the mortgage market. Specifically, the letter emphasized that a guarantor-based model protects both taxpayers and consumers. We also believe this will deliver on both the core principles and the operational needs of the thousands of diverse primary market participants.
The Federal Housing Finance Agency has made progress in stabilizing the GSEs. However, Mel Watt’s tenure as director will soon come to a close and whoever replaces him could reverse these changes.
That is why now is the time for Congress to act and pass reform that benefits lenders of all sizes and does not favor the special interests of a few. Surely everyone can agree on that.