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David Stevens: Here's the MBA view on GSE reform

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David Stevens: Here's the MBA view on GSE reform

David Stevens: Here’s the MBA view on GSE reform


Last week, I read with great interest various stories in the media that focused on House Financial Services Committee Chairman Jeb Hensarling’s comments regarding the future of Fannie Mae and Freddie Mac.

These stories, along with those reporting that Sens. Bob Corker, R-Tenn. and Mark Warner, D-Virginia, have circulated GSE reform language to their Senate colleagues, gives me great hope that Congress is about to act on reforming the secondary mortgage market.

There is, however, one piece of the conversation that concerns me – the idea that the mortgage market could best be served by a system that entails revising the current charter of Ginnie Mae and allowing a new Ginnie Mae to apply its guarantee to private sector mortgages. Though an interesting concept, MBA and its members don’t believe this would be the best approach.

In 2016, MBA created a diverse member task force, with executives who have hundreds of years of experience in the primary and secondary mortgage markets, to consider an array of options in addressing the future of the GSEs. The result was a comprehensive plan to reform the secondary mortgage market.

Specifically, the task force examined the Ginnie Mae concept and identified a variety of concerns that caused them to gravitate toward a different end state, one with federally-chartered mortgage guarantors who are solely involved in the secondary mortgage market. 

Below are a few reasons that this approach wouldn’t succeed:

  1. The MBA model would maintain the “bright line” that separates the primary market from the secondary market. For decades, the industry has advocated for the bright line in order to allow lenders to compete for business (which is good for consumers) without being faced by a federally-backed competitor who operates on both sides of the market, and can thereby utilize market power in one segment to control market share in another. The Ginnie Mae model would eviscerate the bright line by having primary market lenders also issue securities. MBA’s task force feared that this approach would ultimately result in a market dominated by larger lender-aggregators.
  1. The MBA model would level the playing field for lenders of all sizes and business models, providing a more competitive primary market for borrowers. MBA’s model achieves this by requiring guarantors to price at the loan level for credit risk and not offer volume-based discounts or credit waivers. MBA’s plan also requires guarantors to maintain a cash window and allow lenders to sell loans on a servicing-released or retained basis. The Ginnie model would struggle to achieve a level playing field, as larger lenders with access to greater liquidity, would have the ability to become issuers, where smaller lenders wouldn’t. Just look at the number of Ginnie issuers today versus the number of lenders who utilize the GSEs.
  1. The MBA model would go further to minimize transition risk and disruption to the mortgage market. Our proposal advocates limiting changes to those necessary to remedy flaws in the prior system, while preserving key infrastructure to minimize any potential disruption in the market for home financing. That is one of the reasons why we suggest a re-chartered Fannie and Freddie could be the first two guarantors. Transitioning to a Ginnie model would require a completely new build, as Ginnie Mae isn’t currently designed for the conventional market. It’s not clear what benefits would be created from forcing the market to an entirely new securitization infrastructure.

I don’t want this to come off as overly negative toward the Ginnie Mae model, or the great amount of thought that its advocates have put into this issue. We just believe there is a better way and want to work with policymakers to create a system that provides for a liquid, stable mortgage market that best benefits borrowers. 

For more on the MBA’s view, click here.


Source: David Stevens: Here’s the MBA view on GSE reform

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