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Executive Summary
The Mortgage Bankers Association (MBA) is the national association
representing the full depth and breadth of the real estate finance
industry. Its membership of over 2,200 companies includes all elements
of real estate finance: mortgage companies, commercial banks,
community banks, credit unions, thrifts, REITs, securitization conduits,
life insurance companies and others in the mortgage lending field.
This paper is the product of more than a years Replace the implied government guarantee of
worth of work by MBAs Task Force for a Future Fannie Mae and Freddie Mac with an explicit
Secondary Mortgage Market. The task force was guarantee at the mortgage-backed security
created in March 2016 and directed to develop (MBS) level only, supported by a federal insurance
a proposal that will address the future of the fund with appropriately priced premiums.
secondary mortgage market as it relates to Fannie
Mae and Freddie Mac (the Government Sponsored Protect taxpayers by putting more private
Enterprises, or GSEs), and in particular, an end capital at risk through expanded front-
state model that can also fulfill an affordable- and back-end credit enhancements.
housing/duty-to-serve mission. The members of
this task force are made up of individuals from MBA Establish strong capital standards and
member companies those in the market every day, enhanced regulatory powers to ensure a
representing a broad cross-section of the residential sound and stable secondary market system.
and multifamily real estate finance sectors, including
entities of varying sizes and business models. Promote a strong, diverse primary market
through a level playing field for lenders
The task force considered many potential models in of all sizes and business models.
developing its recommendations for a new secondary
market system, ranging from the formation of a Ensure that there is a bright line separating the
government-owned corporation to restoration of primary and secondary mortgage markets.
the GSEs to their pre-crisis form. In assessing the
trade-offs among various approaches, several core Heighten competition by allowing the
principles emerged as critical to ensuring the long- regulator of the new system (either the
term health of the secondary mortgage market. Federal Housing Finance Agency [FHFA] or
a successor agency) to charter new entities
(Guarantors) to provide for securitization of
Principles eligible single-family and multifamily MBS.
We believe that all GSE reform options should Preserve where possible the existing infrastructure
be evaluated and measured against these core for example, a rechartered Fannie Mae and
principles. Working from these principles, MBAs Freddie Mac could be the first two Guarantors.
proposal is for a new government-guaranteed
secondary market end state that would advance Strengthen affordable-housing policy
the following critical policy objectives: consistent with sound lending principles
and a holistic national housing strategy.
Maintain the liquidity and stability of the
primary and secondary mortgage markets Ensure that a robust private mortgage market
through the establishment of a resilient and can exist parallel to the government-backed
vibrant housing finance system, throughout market, with each complementing and balancing
the transition process to the end state. the other through different economic cycles.
Create the Mortgage Insurance Fund (MIF) to Provide the legitimacy and public
guarantee eligible mortgage-backed securities; confidence necessary for a long-term
solution to housing finance reform.
Establish a new, explicit government
guarantee that stands behind the MIF;
Finally, MBA believes that Americas housing The annual assessment of an affordable-
finance system should meet the housing needs housing fee (set within a permissible
of the full continuum of households, from cost range defined by statute) on new
families residing in the most directly subsidized, business purchases of the Guarantors.
affordable rental homes to those served by the
prime jumbo single-family lending market. As Because affordable-housing policy should be
part of this effort, the Guarantors operating in the responsive to feedback from existing programs
government-guaranteed secondary market must and seek new paths forward when necessary,
serve three critical affordable-housing missions: the regulator would have flexibility to adjust
the appropriate mix of goals and the fee to
Provide responsible, sustainable access to maximize the policys effectiveness.
credit for prospective homeowners.
Mortgage Insurance
Implicit Explicit Fund (MIF) funded
Government
government government by premiums paid,
backing of MBS
guarantee guarantee backed by explicit
government guarantee
Government backing
Implicit guarantee Explicit guarantee No guarantee
of corporate debt
Regulatory
No Yes Yes
limitations on pricing
Retained
Large Reduced Minimal
investment portfolio
Need
Low capital levels enhanced
Reduce capital cushion Enhanced Guarantor originator
Capital standards on both retained/
to zero by 2018 capital standards capital
guaranteed risk
standards
Front-end only Testing back-end
SF risk transfers Deeper front-end No evidence of
(MI and lender structures in addition
to private market and back-end adequate investor
recourse) to front-end
appetite. Requiring
Lender and Capital Lender and Capitalsuch sharing
MF risk transfers allows issuers to
Lender Risk Share Markets Risk Markets Risk
to private market
Share/Transfer Share/Transfer game guarantors
on price in similar
Number of entities Two Two Two or more manner to games
GSEs played to
New Guarantor meet housing
No No Yes
entrants permitted goals.
Prohibit guarantee
Preferential pricing Guarantee fee
fee and underwriting
SF lender access and underwriting and underwriting
variances based
by loan volume variances restricted
on volume
Support for
Yes Yes Yes
multifamily finance
Preserve operational
infrastructure Yes Yes Yes
and processes
Affordable
Yes Yes Yes
housing mission
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Affordable Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Administrative reforms undertaken by the Federal To address the need for change, MBA formed
Housing Finance Agency (FHFA), as both regulator a member task force last year to jump-start
and conservator of the GSEs, have resulted in the reform conversation and develop a plan for
significant progress in stabilizing the companies a revitalized secondary market that could be
while paving the way for future reform. Indeed, implemented by Congress working with the next
the GSEs today, operating in conservatorship and administration. The Task Force, representing a
subject to strict regulation, are in a state that is cross-section of both single- and multifamily
already closer to our recommended utility-model lenders of varying sizes and business models,
end state, relative to the pre-crisis GSE system that was charged with two overarching goals:
required dramatic federal intervention in 2008.
Re-evaluate MBAs prior policy proposals
Meanwhile, legislative reform proposals introduced for GSE reform and develop a durable end-
in both the U.S. House of Representatives and the state model that could facilitate access
This plan is
U.S. Senate have yielded productive discussions to mortgage credit through all economic
extremely
but no concrete outcomes. Both chambers cycles while protecting taxpayers; procyclical.
passed comprehensive GSE reform legislation in
committee during the 113th Congress, but these Evaluate a broad range of reform options,
efforts stalled for various reasons, including considering the trade-offs between
concerns about complexity, cost to consumers, different approaches as measured against
fears of exacerbating the impact of credit and a guiding set of principles; and
economic cycles, and the legislations perceived
lack of a sufficient affordable-housing strategy. Develop a vision for an affordable-housing
strategy that could serve citizens along a
As the GSEs move closer to having no retained continuum of economic circumstances.
capital, the possibility of another draw from the
U.S. Treasury even if the GSEs incur just a modest To make the results of those efforts actionable,
loss is very real. While the GSEs have an ample the Task Force was further charged with
financial backstop remaining at Treasury, the current developing a road map that would ensure an
government-dominated system, in which the GSEs orderly transition to the new secondary market
are in a state of conservatorship, is unsustainable system that will minimize disruptive impacts.
over the long term. Looking ahead, establishing a
strong, vibrant secondary mortgage market will
be essential to help power economic growth and
secure a more prosperous future. The stakes are high:
GSE reform must be a top and immediate policy
priority for the new administration and Congress.
1. Taxpayer Protection: The system should greatly 3. Consumer Cost and Access to Credit:
reduce the likelihood that it would require Homebuyers and borrowers are concerned
taxpayer support in all but truly catastrophic, with the all-in cost of obtaining financing.
systemic events. In order to accomplish this Higher capital requirements, more costly
objective, the system should have significant regulation and affordable-housing fees all add
private capital in place to absorb potential to consumer costs. Higher consumer costs,
losses, a clearly defined government backstop, however, would likely be offset by a move to an
strict regulation and supervision, a well- explicit government guarantee of eligible MBS,
defined credit box and carefully targeted as evidenced by the spread between prices on
efforts to make housing more affordable. Ginnie Mae and GSE securities. Of course, not
being able to get a loan either because of
2. Investor Returns: To generate the large tight credit criteria, increased costs or market
amount of private capital required to fund disruption has a negative impact as well.
such a system, the Guarantor business model Roughly one-third of existing-home sales today
and expected returns through the cycle need go to first-time homebuyers, down from a
to be attractive. That is, private investors historical average closer to 40 percent. One
in the Guarantors would have a reasonable of the primary causes for this drop-off is the
expectation of a market rate of return on a higher costs and tighter credit environment in
risk-adjusted basis. To achieve this objective, todays mortgage market. For first-time buyers
Unlike Graham Fisher
investors would want to ensure that capital and others on the margin, a tighter credit
proposal, this plan
provides new requirements are not too high, regulation box can mean being shut out of the market
arbitrages of the and supervision is not too expensive, credit altogether. Efforts to extend affordability and
public and increases standards are sound and efforts to make access to underserved borrowers are one of
resolution costs for housing more affordable do not impinge the items that FHFA or its successor would
failed institution and significantly on returns. Being able to issue closely monitor in the system we envision.
the FDIC MBS with a government backstop, even if
the backstop is paid for through insurance
premiums, is a business benefit because
the backstop ensures the market will stay
open during financial market disruptions.
Prudential Regulation
Guarantors should be required to maintain both
The end state regulator should have cash-window and MBS execution options in
sufficient powers and discretion with order to support large and small lenders alike.
respect to capital regulation and other
aspects of prudential oversight. Guarantors, as a condition of their charter,
should be required to support an effective
Single-family loans eligible for inclusion in national affordable-housing strategy that helps
the government-backed MBS should meet a meet the needs of low-income and underserved
Qualified Mortgage (QM) type standard and be households and communities. This strategy
subject to conforming loan limits established should incorporate both single- and multifamily
by Congress and adjusted over time based approaches to support homeowners and renters.
upon home-price appreciation in a manner
determined by the regulator. Guarantor credit In the recommended end state, the Guarantors
parameters within the QM-eligibility framework, would be focused exclusively on providing
pricing engines and customer interfaces would sustainable credit availability to the single-
be subject to prudential oversight, but should family and multifamily markets in all geographies
remain proprietary to each Guarantor. Multifamily and through all economic cycles.
mortgages of a type and quality similar to those Drawing pictures of pretty landscapes is not the same as engineering
financed by the GSEs today would also be eligible sustainable landscapes. This plan is full of sweet notions but little
for inclusion in the government-backed MBS. detail, no cost estimates and included no feasibility estimates from a
market or economic modeling perspective.
Guarantors may not hold mortgage portfolios
for investment purposes. However, they may
hold a short-term liquidity book to aggregate
loans from cash-window operations, a
contingency portfolio for loss-mitigation
purposes and a limited multifamily portfolio.
Lenders would sell conventional conforming Multifamily loans sold to the Guarantors would
loans into the secondary market by working be securitized in the same manner as today,
with Guarantors. Lenders would also continue utilizing current executions such as Fannie
to originate and securitize loans utilizing other Maes DUS program, Freddie Macs K Deals,
forms of guaranteed and non-guaranteed options, and perhaps other securitization and risk-
including Federal Housing Administration (FHA), sharing/transfer structures to be developed by
U.S. Department of Veterans Affairs (VA), U.S. Guarantors and approved by the regulator.
Department of Agriculture (USDA), Ginnie Mae and
conventional loans held on bank balance sheets or The Guarantors would manage the credit risk on
securitized through private-label securities (PLS). these mortgages through underwriting, retained
capital and through front-end and other risk sharing.
From a lenders perspective, the process of selling In addition, Guarantor pricing would be tightly
conventional conforming loans should be similar regulated by the regulator just as GSE pricing
to the current process. Lenders could sell through is tightly regulated by FHFA as conservator.
a cash window or pool loans into securities. The
Guarantors, including rechartered Fannie Mae and
Number of Guarantors
Freddie Mac and any new entrants, would manage
the credit risk on these pools, and would be the MBA believes there should be multiple (i.e., more
issuers of the MBS. Single-family securitizations than two) Guarantors that are authorized to acquire
would utilize the CSP, at which time the explicit eligible loans from lenders and issue government-
guarantee is placed on the MBS for the benefit of guaranteed single-family and/or multifamily MBS.
investors, ensuring timely payment of principal and Legislation should authorize a process to allow other
interest. A portion of the guarantee fee would be entities to apply for and receive a charter, similar to
used by the Guarantors to cover the MIF premium. the current process for applying for a national bank
charter. A new charter could be specific to the single-
Each of the Guarantors would issue into a single family market, multifamily market or both markets.
security. Most likely, the single security would be
structured the same as the forthcoming Uniform As a utility-style regulator, one of the key factors
MBS (UMBS), but will also have an explicit the FHFA would be required to consider would be
guarantee. Investors will trade single-family the impact of new competitors on both existing
MBS through a TBA market similar to today. Guarantors, on the relevant market and on consumers.
Maintaining the balance in the regulatory compact
would be an important factor in evaluating new
charters. FHFA would determine whether the
applicants meet the standards for a Guarantor charter.
SECONDARY MARKET
R E G U L AT O R
Risk-Sharing
D
Government MBS Wrap / Mortgage Insurance Fund
Single-
Multifamily
family
MBS
MBS
Investors
Product innovation; This creates a meaningful The Uniform MBS, scheduled to launch in 2019,
risk of further skewed should be the basis for the single-family MBS
Pricing and execution; and government policies issued by the Guarantors in order to maximize
driven by unnatural and liquidity. Guarantors would be provided incentives
Customer service. not market driven to distribute credit risk to private market investors
incentives. These rather than retaining all of the risk. Single-family
incentives would become a risk transfer would consist of both (1) front-end,
new form of government lender-arranged primary market credit enhancement
subsidy to theoretically like mortgage insurance and lender recourse,
privately owned
guarantors.
MBA has historically held that the proper role of Fannie Mae and Freddie
Mac is confined to the secondary mortgage market, consistent with
their respective charters. We believe that the separation of the primary
and the secondary markets has been an important element of what has
made the secondary market effective in providing liquidity and making
mortgage credit available nationwide. The division between the primary
and secondary markets has become known as the bright line.
The separation of primary and secondary appropriately to the private capital market; to
mortgage market activities is embedded provide ongoing assistance to the secondary
in the GSEs statutory charters. Both GSEs market for residential mortgages by increasing
charters expressly prohibit the use of their the liquidity of mortgage investments and
lending authority to originate mortgage loans improving the distribution of investment capital
the defining primary market activity. available for residential mortgage financing.
More broadly, the public purposes set forth in Given the critical role that this separation has
their respective charters, which are substantively played in the nations mortgage markets, MBA
similar in this regard, specify a secondary underscores the importance of maintaining
mortgage market role that is responsive to private the bright line, both as it governs current GSE
capital: To provide stability in the secondary activities and in our recommended end state.
market for residential mortgages; to respond
No, the risk is Others have argued that price competition Superior service can win customer loyalty
that the would be impossible because any competitor even if the product and pricing strategy is not
weakest and with the lowest price for the safest business always the best. Just like any other business,
least sound would skim the cream off of the market, leaving there are aspects that are difficult to quantify
player would others unable to earn a market return. Adverse but are nonetheless extremely important.
underprice selection is always a concern but pricing for
risk and roll risk is rarely one-dimensional and market Of course, poor service can also have an impact. DISINGENUOUS
the dice in an participants are always dealing with uncertainty In the post-crisis environment, many lenders wereand inexcusable.
attempt to regarding potential outcomes, not just risk. unhappy with the GSEs approach to repurchase The GSEs sought
gain market demands and rep and warrant enforcement. to enforce reps &
share and In a more competitive market, this behavior warranties and
volume. Product put-backs for
could have led lenders to move away from
Within the umbrella of Qualified Mortgage status the GSEs. In the absence of such competition, loans that were
for eligible single-family mortgages, there would lenders had little negotiating leverage. sold to them but
be no ability for Guarantors to offer high-risk DID NOT meet
products such as NINJA (no-income, no-job, Even the potential for additional competition canthe agreed to and
no-asset) loans or other non-QM products. But have an impact. Economist William Baumol coined required
there would be room for product development the term contestable markets to recognize the underwriting
and product differentiation within the QM rubric. fact that if new competitors could potentially standards. By
enter a market, even that threat of entry can doing so they were
For instance, new adjustable-rate mortgage help to ensure that incumbents will provide goodprotecting
(ARM) products that are viable under QM have service and will keep their pencils sharpened themselves and,
been developed recently as portfolio products. with respect to pricing and product strategy. by proxy, the
We are currently in a predominantly fixed-rate taxpayer from bad
market, but if rates do rise as expected, it is likely behavior by large
that the ARM share of the market will increase. lenders as seen in
Future Guarantors would also compete on settlements.
product development to meet a range of housing
needs (e.g., condos) just as the GSEs do now.
Throughout this paper the MBA demonstrates how well the GSEs compete and work today. They make ZERO arguments to support the need
for more guarantors other than ideological ones. If you consider other natural monopolies, with government charters, they are almost always
full monopolies with truly regulated returns (ie Gas, sewer, water, electric). They are overcapitalized and, as a result, are cycle neutral. In a
national market, a duopsony structure ensures competition on products and service rather than on price. The scale required to succeed in
such a market would make more entrants uneconomic.
GSE REFORM: CREATING A SUSTAINABLE, MORE VIBRANT SECONDARY MORTGAGE MARKET
12
Mortgage Bankers Association, April 2017. All rights reserved.
What is a Qualified Mortgage (QM)? CO N C E PT
I N D E PT H
These standards also include a debt-to-income As a result, some categories of borrowers who
ratio cap of no more than 43 percent, or in the should qualify for a QM are having trouble
alternative, eligibility for the programs of Fannie gaining access to safe, sustainable and affordable
Mae and Freddie Mac (the patch), the Federal mortgage credit. MBA is continuing to work with
Housing Administration (FHA) or other government policymakers, including the CFPB, to improve the
agencies. The safe harbor is also limited to loans rule in order to responsibly widen the credit box.
that are of prime quality based on a pricing
benchmark. Considering the significant potential As the QM patch will expire in 2021, legislation
liability and litigation expenses for a violation of and/or regulatory action is necessary to
the rule, many lenders have limited themselves formulate this QM standard going forward.
to making only QM safe harbor loans.
This approach will incentivize new and complex products and structures that will necessarily be used to arbitrage government policy. Like
the risky loan products and various structured securities in the crisis, Wall Street will 'innovate' around regulators and regulators will
either not be able to keep up with proper oversight or will be exposed to legislative capture and pressure.
and (2) back-end structures such as reinsurance The CSP would also house all GSE historical single-
and capital markets transactions developed by family data. In exchange for an administrative
the Guarantors for the credit-investor market. fee, prospective Guarantors and other market
participants would be able to access this data.
MBS eligible for the government guarantee would Transferring historical data to the CSP and making
consist of single-family mortgages that meet current it available will provide more opportunities for
This is certain
or future QM standards. However, Guarantors would standardization and transparency, while removing
to lead to
be able to define their own credit criteria within a critical barrier to entry for future Guarantors.
gaming of the
the governments eligibility parameters. Making
system.
Guarantor credit decisions open to competition is one Because the CSPs functions are those of a natural
of the most important reasons for having multiple monopoly the sole entity that can review and
competing Guarantors. We believe this approach is certify conventional single-family MBS as eligible
superior to a structure in which a single, monopolistic for issuance with a government guarantee the
entity provides the government guarantee. CSP should be established as a government
corporation under the direction of the FHFA.
As a government corporation, it would not rely
Common Securitization Platform
on federal appropriations and would fund its
The Common Securitization Platform is expected operations exclusively through the fees it collects
to play a significant role in the future single-family as part of the issuance and guarantee process.
market, though repurposed in critical ways. The
CSP would be required to facilitate issuance of
MBS backed by eligible loans/pools presented by
any Guarantor, reducing barriers to entry for future
entrants. In connection with its core functions, the
CSP would also collect the insurance premiums from
the Guarantors and remit them to the Mortgage
Insurance Fund (MIF), as described below.
The key tenet of regulating privately- and culture in competitive markets compete
owned utilities is the regulatory compact: through more efficient operations, product and
private firms that are granted an exclusive process improvements, and customer service.
or limited number of franchises accept the
responsibility (and the regulatory oversight) Investor-owned utility regulation is based on
to serve customers in an efficient and cost of service regulation. The regulatory
nondiscriminatory manner. This compact requires compact requires a two-fold focus:
a balancing of interests by the regulator:
(1) establish prices based on the actual prudent
Investors will only provide capital for provision costs (i.e., avoid monopoly pricing); and
of utility services if they anticipate obtaining
a return that is consistent with returns they (2) provide incentives to maintain a
might expect from employing their capital in an reasonable level of efficiency in serving the
alternative use with similar risk; customers will customers. Rates are set with reference to
only accept utility rates if they perceive that the the Total Revenue Requirement (TRR)B
rates fairly compensate the utility for its costs,
but are not excessive as a result of the utility Regulators can directly monitor and control rate
taking advantage of its privileged position.A of return or pricing. For monopolies, regulators
may set rates based upon observed costs and This is a plea
In addition to the legal and economic rationale an agreed-upon level of return. In markets with for
for utility-style regulation of the Guarantors, this multiple utilities operating, those with significant government
framework is also intended to directly address market power may be held to regulated, cost- subsidies for
the problematic growth-company models and based rates, while new entrants may be allowed the newest
mindsets that existed at the GSEs prior to the greater flexibility to charge market-based rates. entrants.
financial crisis. The compulsion to grow led to
excessive risk taking in a reach for market share, Typically price regulation in these markets
an unhealthy focus on the portfolio businesses requires nondiscriminatory pricing across the
and encroachment on the bright line, as the customer base, i.e., there is a level playing field.
GSEs leveraged their duopoly power to grab Pricing also tends to be transparent, with rates
an ever-larger share of industry profitability. and the rate calculation posted for public input.
By contrast, investor-owned utilities and Clearly many aspects of this style of regulation
their regulators aim to provide shareholders and business model are good fits for the role of
with a steady dividend over time. Utilities are Guarantors in a future market. Moreover, FHFA in its
encouraged to deploy large capital outlays in role as conservator has moved regulation of pricing
relatively low risk, regulated business models in this direction already, with more level and more
to achieve stable outcomes for investors and transparent pricing than was the case pre-crisis.
consumers. Companies with this mindset
B. Ibid.
For loans or securities kept on balance sheet, the requirements for the GSEs. These authorities were
minimum capital requirement was 2.5 percent, not really utilized as the GSEs were subsequently
while for MBS that were guaranteed but sold to placed into conservatorship. Note that guarantee
other investors, the minimum requirement was fees charged by Fannie Mae and Freddie Mac
0.45 percent. These capital levels were found have roughly tripled through the conservatorship
to be inadequate through the crisis as default period, a symptom of the implied capital standards
rates exceeded 12 percent for certain mortgage for the GSEs being increased substantially. As
vintages, with loss rates above 4 percent. shown in the chart below, another indication of
70 5.6
60
5.2
50
4.8
40
4.4
30
20 4.0
10 3.6
0 3.2
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
2014
2016
2013
2015
2012
2017
2011
In the wake of the crisis, accounting rules this implicit increase in capital is that rates on
and bank regulatory standards changed in a 30-year fixed jumbo mortgages, which previously
manner to bring assets and liabilities that were had been 25-50 basis points higher than those
previously considered off balance sheet onto for conforming loans, crossed over in 2013 and
the balance sheet through consolidation. since have regularly been lower than conforming
rates. This suggests that current implied capital
The Housing and Economic Recovery Act, passed levels for the GSEs are similar to those embedded
in the summer of 2008, provided the FHFA director in bank pricing models for jumbo mortgages.
broader authority and more discretion with
respect to both risk-based and minimum capital
2 The GSEs capital ratios were well below 2 percent in the years immediately preceding the financial crisis.
Congressional Budget Office, The Effects of Increasing Fannie Maes and Freddie Macs Capital (October 2016),
https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/52089-gse-report.pdf.
3 12 U.S.C. 1821(n).
MAR
NOV
AUG
MAY
OCT
DEC
APR
JAN
JAN
JUN
FEB
FEB
JUL
LEGISLATION
Congress passes GSE Reform Legislation
PREPARATION
Comprehensive Mortgage Multifamily
Transition Plan Insurance Fund Business Lines
IMPLEMENTATION
Capitalization/Transfer of Formation of Transitional
Assets and Liabilities Successor Entities
Regulator allows
Newly Chartered
for New Entrant
Guarantor(s)
Legislation Enacted Guarantor Applications
Bridge Bank Model and a new bank is chartered by the Office of the
One transition approach that would allow the GSEs Comptroller of the Currency and controlled by
to effectively be rechartered as Guarantors is the the FDIC. The new bank bridges the gap in time,
bridge bank model. As discussed below, Congress enabling the FDIC to evaluate and market the bank
modeled the approach already in the HERA statute to third parties, and enabling prospective purchasers
after the bridge bank model the FDIC has long to evaluate the bank in order to submit an offer.
applied to resolve banks that have become insolvent.
An advantage of a bridge bank is that it provides It appears
Bank resolution models like bridge banks are time to arrange a permanent resolution, giving this plan is
designed to protect depositors and the federal DIF. purchasers and investors the opportunity to just a
By law, the FDIC must choose the bank resolution evaluate the bank and submit bids. During the backdoor
method that is the least costly to the DIF. time the FDIC is operating the bridge bank, the way for the
FDIC prepares to sell the bank by soliciting interestlargest
The bridge depository provisions of section 11(n) and arranging for due diligence by potential banks to co-
of the Federal Deposit Insurance Act4 allow the FDIC acquirers, and by receiving and evaluating bids. invest in
to restructure insured depository institutions during and own the
conservatorship after passing the insolvent institution Significantly, a bridge bank preserves franchise GSEs
through a receivership to reduce certain liabilities. The value, ensures continuity of services, and gives business as a
remaining assets and liabilities of the institution are the FDIC and purchasers time to consider new
then salable to private parties through stock offerings. pricing. These features of a bridge bank could be guarantor.
advantageous in resolving and reforming the GSEs.
One resolution method employed by the FDIC
is a purchase and assumption transaction (P&A) FHFA authority under current law provides for
utilizing a bridge bank in which a third-party something very much like an FDIC bridge bank in
institution buys some or all of the assets and some a receivership situation. Under HERA, FHFA can
of the liabilities of the institution. A bridge bank establish a bridge bank known as an LLRE that
P&A may be a useful model for transitioning to can operate for two years, with three one-year
Guarantors and addressing the legacy MBS assets extensions before it must be sold or resolved.
and liabilities of the GSEs. In a bridge bank P&A, the
FDIC temporarily acts as the acquiring institution
4 12 U.S.C. 1821(n).
Regulator allows
Newly Chartered
for New Entrant
Guarantor(s)
Legislation Enacted Guarantor Applications
Both Treasury and the Federal Reserve assisted Treasurys steps resulted in a positive return on
AIG with numerous restructuring and reform taxpayers investment and Treasury continues to
efforts, and those efforts ultimately enabled hold warrants to purchase shares of AIG common
both agencies to recover substantially greater stock, which could increase the return when
repayment amounts than they invested to stabilize exercised. Treasury also allowed AIGs board of
AIG. Other aspects of the restructuring may directors to declare a dividend to AIGs common
be instructive as models for restructuring the stockholders in the form of warrants to purchase
Enterprises in ways that protect taxpayer interests. shares of AIGs common stock, with a condition
that each party to the recapitalization plan would
A salient aspect of the AIG restructuring is agree to close the deal on a certain date.
that AIGs operations were streamlined. AIG
retained its core insurance operations while GSE reform legislation, therefore, should grant
selling non-core assets and reducing its MBS FHFA and Treasury substantial discretion to divest
and derivatives exposure, thereby decreasing the governments equity interests over time.
the size of the company. Over a period of 19
months, the Treasury conducted six different
public offerings of AIG common stock.
Looking ahead, these housing needs must The government-backed secondary mortgage market
continue to be met through a broad variety must provide liquidity to facilitate the development,
of approaches that include single-family and preservation and purchase of all types of housing.
multifamily housing capitalized by private, nonprofit, Where it cannot achieve this goal alone, it should
government or a combination of sources. But, with act in tandem with other resources to facilitate
affordable-housing needs so great, the secondary access to safe and reasonable-quality housing.
market must also play a supporting role. Moreover, government policy in general should
reflect a unified, holistic approach that responds
MBA research shows that in the United States there to the full scope of housing needs. An effective
will be demand from 1.4 million to 1.6 million additional affordable-housing policy must also be flexible and
household units each year for the next 10 years.5 innovative, responding to feedback from existing
Demand for housing will come from households programs and seeking new paths forward.
that are increasingly diverse across dimensions
of age, race, ethnicity and geography. In addition The continuum framework provides a single
to these differences, Americans are increasingly context for integrating the roles of single-family,
divided by income and wealth. While some families multifamily and other programs in serving the
are prospering, others feel they are falling further housing market. The framework identifies five broad
behind as they struggle to pay bills, secure an housing market segments that policymakers should
affordable home or send their children to college. consider in crafting a holistic housing strategy.
The growing economic divide has real-life The continuum roughly categorizes households as:
consequences for the housing market: In 2015, the
typical college-educated worker earned nearly twice Low- and very-low-income renters
as much as someone with a high school degree.6 occupying affordable rental units,
This divergence means that better-educated
households often outbid others for limited housing Renters occupying market-rate housing,
resources, placing upward pressure on rents and
prices especially in desirable neighborhoods with Credit-ready prospective homeowners,
decent housing, low crime and good schools. Falling
homeownership rates among those without a college Homeowners currently served by the GSE
degree also contribute to growing wealth inequality. single-family and condominium business, and
Affordable-housing policy is an essential part of the
solution to these serious socioeconomic challenges. Homeowners served by the prime
jumbo market (who should not benefit
from a government guarantee).
5 Housing Demand: Demographics and the Numbers Behind the Coming Multi-
Million Increase in Households. Fisher and Woodwell (July 2015).
6 MBA Economic and Mortgage Finance Outlook, MBA Annual Convention, October 2016.
The Continuum
Affordable Rental (with and without Affordable Homeownership: Qualified prospective
subsidies): Households that are significantly borrowers who may lack savings or family wealth
below the area median income and may be necessary for traditional down-payment.
eligible for policy-directed subsidies.
TBA Conforming: Core of conforming GSE
Moderate Income and Market-Rate Rental: single-family market. Benefit from government
Households that earn in the range of area average guarantee is primarily lower mortgage
income. Depending on market circumstances, rates created by the additional liquidity.
rents may be moderately burdensome.
Prime Jumbo: Loans above the conforming
loan limit. Not intended beneficiary
Core GSE purchase activities
of government guarantee.
GSE can partner as debt buyer;
other direct funding required
Private market
AMI Area Median Income Affordable TBA
Prime Jumbo
Homeownership Conforming
Affordable Rental
Moderate Income and
(with and without
Market-Rate Rental
subsidies)
LIHTC GSE MF targeted GSE high LTV SF GSE core SF Private market
EXISTING PROGRAMS
70%
8,000,000
60%
6,000,000 50%
40%
4,000,000
30%
20%
2,000,000
10%
0 0%
< $20,000 $20,000-34,999 $35,000-49,999 $50,000-74,999 $75,000+
Improving
Preserving Liquidity for
Expanding Access
and Developing Underserved
to Affordable
Affordable Rental Segments of the
Mortgage Credit
Housing Mortgage Market
2. Guarantors must work to provide liquidity for 3. Guarantors must improve liquidity for segments
the development and preservation of affordable of the market that are currently underserved.
rental housing. Widespread access to affordable Access to both mortgage credit and affordable
rental housing of decent quality is essential rental housing remains a challenge for many
to enhancing social mobility and promoting segments of the market. These market
economic growth. Unfortunately, the gap between segments include minority households as well
household incomes and the cost of building and as traditionally underserved parts of urban,
maintaining rental housing (including moderate- suburban and rural communities. Credit also
income working households and those with remains constrained in the market for lower-cost
special housing needs continues to grow. The manufactured housing. Without an adequate
figure above shows that the share of households policy response, these challenges will likely
with moderate rent burdens (paying more than grow even more acute in light of powerful
30 percent of income toward housing) and demographic trends now underway, including
with severe rent burdens (paying more than 50 the increasing diversity of the U.S. population.
percent) is high. The housing system must place a The secondary market must therefore seek new
renewed focus on facilitating the renovation and ways to evaluate and underwrite borrowers and
preservation of the existing housing stock serving develop innovative products, partnerships and
low- and very-low-income households, as well as programs to respond to changing demographics
the development of new affordable rental homes. and reach underserved groups and communities.
8 For the calendar year 2015, 64 percent of the rental units in multifamily buildings with mortgages purchased by
Fannie Mae had rents that were affordable to households at or below 80 percent of area median income, and
82 percent of the units were affordable to those at or below median income. At Freddie Mac, the shares were
75 percent and 89 percent, respectively. (See Fannie Mae 2015 Annual Housing Activities Report and Annual
Mortgage Report; and 2015 Annual Housing Activities Report Federal Home Loan Mortgage Corporation.)
Because of this uncertainty, the regulator should The following discussion outlines a new approach
be empowered to choose a combination of to affordable-housing goals that addresses these
goals and a fee, within limits set to ensure the and related concerns. Under this approach, some
continuity of business strategies, to best achieve of the goals would include specific, quantifiable
its affordable-housing missions. Flexibility will outcomes based on loans made to distinct
be especially important in the early stages borrower/market segments. Others would focus
of GSE reform, but the concept of dynamic on qualitative efforts, such as outreach, research
housing goals, with appropriate governors, and targeted initiatives. Both are intended to
should be a core part of the new system. work in tandem with and complement each
other, and not be substituted for the other.
The plan and its implementation should be
updated according to a periodic timeline The regulator should assess the performance of the
that is defined in statute. The timeline should Guarantors in each of the relevant mission areas,
include adequate opportunity for the regulator including consideration of actual mortgage purchases,
to evaluate market conditions, establish a set outreach activities, and related research and
of proposed goals and recalibrate them after development efforts. A combination of quantitative,
receiving public input. It should also allow the market-based targets and qualitative, activity-
Guarantors a reasonable implementation period. based targets should be used. The regulator must
The regulator would then report to Congress define goals in a manner that is appropriate for
on an annual basis on its progress in meeting single-family and multifamily Guarantors, provided
the objectives of the affordable-housing plan. that goals for similar business lines are the same.
The GSEs continue to move closer to a point where Enhance the stability of the mortgage
they will have no retained capital. The threat of a draw system with multiple Guarantors replacing
on their line of credit with the U.S. Treasury looms as the GSEs and operating as privately-owned
a very real possibility. At the same time, the housing utilities that are not too big to fail.
needs of millions of lower- and moderate-income
families today remain unmet. Access to mortgage Improve service and performance in the secondary
credit is unnecessarily tight, while rental cost burdens market with multiple Guarantors competing
continue to weigh heavily on family budgets. on operations and systems development,
customer service, product parameters and
This paper is designed to provide the spark for a innovation, and pricing and execution.
renewed focus on GSE reform. It outlines the key
principles and guardrails that should guide this effort Ensure that mortgage lenders of all
and provides a snapshot of what the new secondary- sizes and business models have equal
market end state should look like. It also attempts access to the secondary market.
to shed light on two critical areas that have tested
past reform efforts the appropriate transition to Minimize disruption during the transition to
the post-GSE system and the role of the secondary the new system by preserving what works in
market in advancing an affordable-housing strategy. the current system and utilizing the existing
regulatory framework where appropriate.
While achieving GSE reform will not be
easy, the potential upside is great. Our Ultimately, GSE reform holds promise to create
recommended approach to reform will: a more vibrant and sustainable housing finance
system that can enhance the lives of millions
Inject much higher levels of risk-bearing of Americans and help stabilize the housing
private capital into the mortgage system, market for decades to come. The hard work
while dramatically reducing the systems of reform should proceed without delay.
reliance on government support.