January 29, 2014 View entire issue of ANO         Close 

Treasury Supports Comprehensive Housing Finance Reform

Despite Fannie Mae’s and Freddie Mac’s recent and significant profits, the U.S. Department of the Treasury still is pushing for comprehensive housing finance industry reform, Mortgage News Daily reported Jan. 22.

Speaking at the ABS Structured Finance Industry Group conference in Las Vegas, Dr. Michael Stegman, Treasury secretary for housing finance policy, said that the mortgage finance system dominated by the government-sponsored enterprises has not been fixed and that operating the GSEs in the current manner is not sustainable or sensible.

Stegman said that the GSEs’ recent quarterly profits may “significantly overstate the true financial condition of the enterprises,” Mortgage News Daily reported. He noted that some of the GSEs’ recent income is the result of one-time tax reversals, release of loan loss reserves and settlements of legacy securities litigation.

He also noted that in the first three quarters of 2013, more than 60 percent of Fannie’s and Freddie’s combined income was from their investment portfolios, which they have been required to steadily shrink under agreements with the Treasury. The GSEs also have benefited from strong home price appreciation and low interest rates, neither of which will continue indefinitely into the future.

Stegman further argued that uncertainty about the GSEs’ future will continue to impede access to credit, which is why he sees comprehensive housing finance reform as a major priority of the Obama administration.

President Obama’s objectives for reform include requiring private capital to play the lead role in providing mortgage credit, making sure responsible borrowers continue to have broad access to mortgages, having safeguards in place to protect taxpayers from making huge bailouts and ensuring that affordable rental options exist for the middle class, Mortgage News Daily reported.

Stegman said a new housing finance system must have a catastrophic government guarantee for qualified mortgage-backed securities with private capital in a first-loss position. He proposed reducing the price gap between Fannie’s and Freddie’s securities by linking the two together, which would help reduce costs to taxpayers.

He also indicated that the holding or syndicating of credit risk needs to be separate from the process of securitizing mortgages so that firms holding credit risk would not also be the ones controlling the infrastructure to create securities, thus making them “too big to fail.”

“Our preference would be that all single-family mortgages that receive a government-backed wrap be securitized through a single, nonprofit securitization utility that would issue standardized mortgage backed securities,” Stegman said, Mortgage News Daily reported.

A well-capitalized guarantor would be responsible for paying all credit losses on a given MBS pool with the government stepping in only when all of the guarantor’s capital is exhausted.

Stegman also said it would be necessary to have a strong independent regulator to enforce compliance with a mortgage system offering credit on an “equitable and non-exclusionary” basis, and he added that a future housing finance system would need many more participants and offer greater competition than the current system, where Fannie and Freddie dominate the market. He also called for a national mortgage database, Mortgage News Daily reported.

Stegman cautioned that an overhaul of the nation’s housing finance system would take at least five years so as not to disrupt liquidity and access to credit. Part of that process would involve Fannie and Freddie ramping up their commitment to a common securitization platform.

He said a new system also needs “a robust non-agency private label securitization market,” something the nation currently lacks, Mortgage News Daily reported.

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