Secondary Market Reform: Moving from Concept to Reality

NEW YORK–After years of sitting in limbo, can substantive, comprehensive reform of Fannie Mae and Freddie Mac finally be possible?

“Change appears to be possible in Washington,” said MBA Chairman Rodrigo Lopez, CMB, executive chairman of Northmarq Capital, Omaha, Neb. “Comprehensive GSE reform is the last piece of the puzzle.”

Lopez, speaking here at the MBA National Secondary Market Conference & Expo, said following publication two weeks ago of MBA’s white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market, momentum appears to be building for a legislative fix on Capitol Hill.

“This is important,” Lopez said, “because ultimately change has to come through Congress.”

MBA Chief Economist Mike Fratantoni noted over time, MBA’s proposals to reform the GSEs have been consistent, while adapting to changing environments. “We’ve moved from concepts to having things on the playing field,” he said. “We’ve had to adapt as the environment has changed.”

The conservatorship, now in its eighth year, has become unsustainable, Fratantoni said. “Not only is it unsustainable, it is politically and economically unstable,” he said. “Ending the conservatorship must start with reform first.”

The paper ( establishes the following principles, leading to a new government-guaranteed secondary market “end state” that would advance the following critical policy objectives:

–Maintain liquidity and stability of the primary and secondary mortgage markets through the establishment of a resilient and vibrant housing finance system, throughout the transition process to the end state.

–Replace the implied government guarantee of Fannie Mae and Freddie Mac with an explicit guarantee at the mortgage-backed securities level only, supported by a federal insurance fund with appropriately priced premiums.

–Protect taxpayers by putting more private capital at risk through expanded front- and back-end credit enhancements.

–Establish strong capital standards and enhanced regulatory powers to ensure a sound and stable secondary market system.

–Promote a strong, diverse primary market through a level playing field for lenders of all sizes and business models.

–Ensure that there is a bright line separating the primary and secondary mortgage markets.

–Heighten competition by allowing the regulator of the new system (either the Federal Housing Finance Agency or a successor agency) to charter new entities (“Guarantors”) to provide for securitization of eligible single-family and multifamily MBS.

–Preserve where possible the existing infrastructure–for example, a re-chartered Fannie Mae and Freddie Mac could be the first two Guarantors.

–Strengthen affordable-housing policy consistent with sound lending principles and a holistic national housing strategy.

–Ensure that a robust private mortgage market can exist parallel to the government-backed market, with each complementing and balancing the other through different economic cycles.

Three members of the MBA Task Force for the Future of the Secondary Market discussed the paper and its processes: David Battany, executive vice president of capital markets with Guild Mortgage Co., San Diego; Keith Bickel, senior vice president of mortgage policy and strategic analytics executive with Bank of America, Charlotte, N.C.; and Albert Blank, senior vice president of business development with Union Home Mortgage, Strongsville, Ohio.

“Congress has to act because they are the only group that has the authority to do the things we want,” Blank said. “Congress has to allow us to move Fannie Mae and Freddie Mac into the utility.”

FHFA, Blank added, has to not only enable the structure of the new entities, but to also allow for creation of future entities to enhance the secondary market. “Either FHFA or its successor must be able to create and guarantee new secondary market players,” he said.

Battany said the Task Force wanted to make sure that it understood what wasn’t working as well as what was working well. “For example, the multifamily element of the GSEs is working quite well,” he said. “On the other hand, minimizing risk was a key concern, which is why we pushed the idea of multiple entities.”

Bickel said the Task Force worked hard toward a workable end model that accommodated the broad-based concerns of Task Force members. “This is one of the few times I saw all the segments of the lending industry agree on a solution,” he said.

Bickel noted that uncertainty remains as to how many guarantors would exist in an end-model scenario. “It could be as few as two; it could be as many as eight, or even more,” he said. “The idea is to allow the market to determine what is needed.”

Bickel said the “bright line” between the primary and secondary market was a “no-brainer.”

“It stays,” Bickel said. “In crafting a solution for the secondary market, the bright line was non-negotiable.”

The transition phase, Fratantoni said, begins immediately after Congress enacts legislation that specifies and end state and provides for a transition process. It is a three-phase process that involves preparation, implementation and divestiture, in which the government sells its interests in the Guarantors to private investors, while ensuring continued regulation of the Guarantors under the framework.

Just as important, Battany noted, was the affordable housing element, a consideration specifically requested by Senate Banking Committee Chairman Mike Crapo, R-Idaho.

“You want a transparent goal that is very clear and well-defined,” Battany said. “In the past, it was expressed in a percent, but there are more questions–does it encourage more production? Does it take into consideration student debt? And how are goals enforced? It was important that the Task Force worked with MBA on this, because we saw some of the goals as being unrealistic. We want to have goals that create good results and don’t end up creating unintended consequences.”

So, how will MBA and the Task Force know if they’ve been successful? “Simply doing nothing was not an option,” Blank said. “At the end of 2018 there isn’t going to be a lot of cash left, and Fannie Mae and Freddie Mac need to make a lot of structural changes so that they can continue to do the great job they do.”

“If the end result is that we’ve given the secondary market the tools it needs to weather future storms and protect taxpayers, then we will have succeeded,” Blank added. “This has not been easy–and it scares people. If we get this wrong, the risk is pretty big. We have to take our time–and I think we have–and we have to have a methodical change that doesn’t completely disrupt the market. A few years from now, we should have a number of Guarantors who are creating a healthy secondary mortgage market, and that is how we’ll know if we got it right.”