The government's involvement in the mortgage market has ballooned to unhealthy proportions, according to the Mortgage Bankers Association (MBA). So what can the Federal Housing Finance Administration (FHFA) do to bring private capital back into the market and foster true competition?
According to the MBA, one solution is to require Fannie Mae and Freddie Mac to offer risk-sharing options to lenders at the point of sale, rather than at the back end with loans already on the balance sheets.
Doing so would allow for ‘deeper private credit enhancement to the GSEs in exchange for lower fees charged to borrowers and lenders,’ the MBA states in a new paper titled ‘Up-Front Risk Sharing: Ensuring Private Capital Delivers for Consumers.’ This, in turn, would shift the risk back to the private sector and away from taxpayers.
This is one of several recommendations the MBA is asking the FHFA to consider in order to increase credit for consumers and reduce the government's footprint in the industry.
Requiring the GSEs to accept loans with deeper levels of credit enhancement in exchange for reductions in guarantee fees and other loan-level charges would help drive more private capital into the market, thus reducing taxpayer risk, the MBA asserts. What's more, borrowers would benefit from increased competition.
‘If, however, the transaction were to occur before the loans are sold, lenders would be effectively 'derisking' the mortgages before they are brought to the GSEs, and the [mortgage insurance companies] would be competing for the business in the open market across hundreds of lenders, rather than in a negotiated transaction with just two GSEs,’ the MBA says in its paper.
Earlier this month, the MBA released a discussion paper calling for the creation of a common mortgage-backed security for Fannie Mae and Freddie Mac in order to ‘enhance liquidity, reduce costs to taxpayers and lay the groundwork for a more competitive and efficient secondary market.’
Titled ‘Key Steps on the Road to GSE Reform,’ the paper asserts that the FHFA should align securities into one fungible currency in order to ‘operationally align’ the GSEs, thus fostering increased investment in the housing market.