New Jersey has a long and rich history of nurturing inventions and inventors. The works of Edison, Einstein and Roebling continue to improve our lives.
Scott Garrett may someday be added to this list.
Rep. Garrett has put forth legislation to end the government-sponsored enterprises Fannie Mae and Freddie Mac and wean the U.S. housing industry off the taxpayer's wallet. Congress should make moving this bill forward a high priority.
The Private Mortgage Market Investment Act encompasses many pieces of existing Fannie and Freddie regulations that standardized residential mortgage origination and securitization for over 40 years. Its main goal is to replace these insolvent secondary market dinosaurs with a private-market solution by encouraging investors to participate and increase liquidity.
Transparency will be improved in ways that will attract private investors.
- The bill requires a five-day period, for investors to perform adequate due diligence, from when a mortgage-backed security deal originates to the time it is sold. This provision will correct a major shortfall of the last decade: mortgage-backed securities were rushed out the door to market and there was too much reliance on the rating agencies for due diligence.
- The performance of the each loan in a pool will be tracked with a marker. MBS pricing history will be disclosed and the securities will be exempt from the registration requirements of the 1933 Act.
- Disputes involving priority of claim will be clearly and specifically defined and upheld. Issues with representations and warranties will be resolved through arbitration, and investors of MBS will be able to appoint their own independent third party to act on their behalf.
- The Federal Housing Finance Agency will lead much of the development of the rules and regulations for this new market, including the development of standardized legal documentation for the securitization agreements and credit standards for the different loan pools.
- The bill would change provisions of the Dodd-Frank Act to provide more legal certainty to mortgage investors. Dodd-Frank requires ability-to-pay verification, but with certain low-risk "qualified mortgages" (not to be confused with qualified residential mortgages) the ability to pay is assumed. The great unknown has been whether QMs would subject creditors, assignees and other investors of such securities to unknown legal liability. The Garrett bill clarifies that investors will not be held accountable for the sins of the originators.
- It strikes the ambiguous risk-retention rules of Section 941 of the Dodd-Frank Act, which applies to every entity but exempts the GSEs and Ginnie Mae from having to keep skin in the game.
- It prohibits government-mandated modifications.
Best of all, the bill has no implied guarantee from the U.S. government. The result will be lower mortgage rates and increased loan options for consumers. It should go a step further and require one set of professional standards for every mortgage officer. The mortgage process begins with a loan originator; exempting originators from licensing simply due to a bank charter does not add confidence in the finished loan product.
Garrett, after a decade of sounding the alarm about the financial iceberg facing Fannie and Freddie and being virtually ignored, now enjoys broad support across the political aisle. Even the GSE godfather Rep. Barney Frank recognizes that they need to be replaced. After decades with his head in the sand, he has finally seen the light, or a lifeboat for his reputation.
Edward DeMarco, the FHFA's acting director and conservator of Fannie and Freddie, supports the private market approach. He must feel like the dean of students who is forced to clean up the campus after a three-day keg party. He recognizes that with almost $5 trillion in mortgages and a current market share of over 90% they cannot continue to effectively operate and our housing market will not recover.
As a mortgage lender, I have witnessed firsthand how the GSEs wandered off the ranch. By charter they were supposed to operate solely in the secondary market. Over the past two decades, under the banner of expanding homeownership and aided by their accomplices in Congress, Fannie and Freddie lowered underwriting standards and bought increasingly riskier loans. In the last decade they even began to advertise directly to consumers to become homeowners. Their shareholders profited heavily and the executives enjoyed fat bonuses, thanks to the implied guarantee by the U.S. government.
In the interview for my certified mortgage banker designation, GSE reform was front and center. I shared the opinion of my panel of executives from the private sector, the FHLB and even the GSEs that they needed to be reined in. This was in 2007. After their collapse, the hangover continues: those seeking new loans are faced with higher interest rates caused in part by pricing overlays from the GSEs. Fannie and Freddie have cost the taxpayers over $170 billion, with no end in sight.
As an American and a homeowner, I support this bill because it will enable more mortgage choices and better rates as competition increases, and it accomplishes this by awakening the sleeping giant in the private sector.
Richard Booth is a certified mortgage banker with America’s First Funding Group LLC, a residential and commercial lender in Neptune, N.J.
