Wednesday
October 1, 2014

Inertia Might Win Out in Secondary Mortgage Market Reform

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Inertia Might Win Out in Secondary Mortgage Market Reform

With secondary mortgage market companies Fannie Mae and Freddie Mac making money again, there’s a good chance lawmakers in Congress will drag their feet on overhauling the country’s residential secondary mortgage market system, despite its almost 100 percent reliance on the federal government today. That's according to Robert Couch, a member of the Bipartisan Policy Center housing commission that earlier this year published a 140-page report on how to reform the system titled “Housing America’s Future: New Directions for National Policy.”

“Inertia is gaining momentum,” Couch told hundreds of REALTORS® at a regulatory forum Tuesday morning at the 2013 NAR Midyear Legislative Meetings & Trade Expo in Washington, D.C. Couch is a past president of Ginnie Mae, the FHA loan guarantor, and a past general counsel of the U.S. Department of Housing and Urban Development. He’s also a past chair of the Mortgage Bankers Association.

The report by the housing commission, which included a broad mix of industry professionals and former policymakers, recommends converting the current system to a private capital–dominated market over 10 years by unwinding Fannie Mae and Freddie Mac and maintaining a federal presence as a catastrophic backstop, something on the model of Ginnie Mae.

Just as important as the new system is how the transition period would be structured, Couch and others participating in the forum said, because the global investment community must remain confident in the stability of the 30-year, fixed-rate mortgage market throughout the transition. Otherwise, the availability of mortgage financing would be jeopardized.

“You can’t risk messing up what global investors like about Fannie Mae and Freddie Mac,” said Adolfo Marzol of Essent Guaranty, a private mortgage insurer.

NAR's position is that the groundwork should be laid for the return of private capital to the market, supported by a federal presence through a nonprofit, government-chartered entity, which would ensure the availability of safe and affordable mortgage financing in all market types.

Barbara Novick of global capital giant BlackRock says there simply isn’t enough private funding available today to replace the capital that’s provided by the federal government. Fannie Mae and Freddie Mac have exposure of more than $5 trillion, she said, an amount that’s largely out of reach of private capital at the present time. “Are private lenders going to replace that?” she asked.

Even if that amount of capital were available, without the new structure ensuring the protection of their rights, investors aren’t going to feel comfortable returning to the market. She cited two examples in which the contractual rights of first-lien holders have been trampled on in the aftermath of the mortgage meltdown: in the federal government’s mortgage modification program, the Home Affordable Refinance Program, which she says modifies troubled mortgages on the backs of the first-lien holders, and in the national mortgage settlement, structured by  state attorneys general in the aftermath of widespread foreclosure irregularities by the big banks. In both cases, she said, first-lien holders have been asked to take the first hit, a position that conflicts with contract law.

The panelists said they’re ready to look carefully at the securitization platform the Federal Housing Finance Agency is preparing to roll out, possibly as early as next year.

The FHFA is the conservator of Fannie Mae and Freddie Mac, and the new platform is being seen by policymakers as a key step in the eventual unwinding of the two companies. It is expected to serve as the vehicle for future securitizations by Fannie and Freddie, but it will also be available for other financial institutions to use. Details have yet to come out, but it shows that reform is already poised to happen on the regulatory side, separate from anything Congress ends up doing.

For that reason, whether or not inertia wins out on Capitol Hill, at least some things will change in the secondary market, the panelists said, making REALTOR® engagement key to ensuring mortgage finance remains available to real estate without interruption.

—Robert Freedman, REALTOR® Magazine

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