MBA Letter to FHFA Cites Concerns with GSE Risk-Sharing

The Mortgage Bankers Association this week urged the Federal Housing Finance Agency to direct Fannie Mae and Freddie Mac to reduce their retained risk and that FHFA incorporate more explicit up-front risk sharing targets in the GSEs’ 2016 scorecards.  

In a Nov. 30 letter to FHFA Director Mel Watt (http://mba.informz.net/MBA/data/images/Risk Share Letter_DirectorWatt122015.pdf), MBA President and CEO David Stevens, CMB, said while FHFA has made “substantial efforts” to reduce taxpayer exposure by requiring Fannie Mae and Freddie Mac to undertake credit risk transfers, concerns remain over the GSEs’ retained risk practices, particularly involving mortgage insurance.  

“MBA believes that up-front, loan-level risk sharing, pursued in a manner that would maintain a level playing field for lenders of all sizes, particularly through greater use of private mortgage insurance, would reduce taxpayer exposure to mortgage risk, and that the enterprises are well placed to manage any residual counterparty risk given the new master policies and the [Private Mortgage Insurer Eligibility Requirements] standards which were just finalized,” Stevens wrote. “Moreover, multiple forms of up-front risk sharing should be piloted, including not only deeper cover MI, but also greater use of lender recourse.”  

MBA said FHFA should require use of transparent secondary market pricing that is available to all approved lenders. “We urge FHFA to require the enterprises to move a meaningful extent of their mortgage credit risk to up-front transactions that are transparent, replicable and available to lenders of all sizes,” the letter said. “In alignment with FHFA’s goals, this effort reduces taxpayer risk, maintains a liquid and dynamic market, and helps to build towards the new system by increasing the amount of private capital in front of the enterprises and their federal backstop.”  

Stevens noted a large portion of the letter concerns mortgage insurers. “We wanted to stress that we don’t view MI as the sole solution to meet the demands of up-front risk share,” he said. “However we felt the need to acknowledge the importance of MIs in this equation given all of the expressed concerns MBA has heard.”  

The letter outlines four essential elements for an effective risk share model:  

–FHFA should explore many forms of up-front risk sharing.

–The risk share model must ultimately ensure up-front risk is distributed throughout the private sector with large numbers of competitors, with the GSEs serving as a catastrophic backstop.

–Transactions should be accessible to institutions of all sizes, whether they are banks or not. The GSEs should not be involved between lender and credit enhancement, as is the case today.

–Transactions should be transparent, allowing lenders to find the lowest price available to consumers through competing companies with multiple offerings.