One small step towards housing reform

August 13, 2014 at 9:07 am Leave a comment

Yesterday the FHFA, which has oversight over Fannie Mae and Freddie Mac took another tentative step in what passes for housing reform in politically paralyzed Washington. It announced a Request for Comment on a proposal to begin offering a mortgage-backed security issued jointly by Fannie and Freddie Mac. This is both more important than you might think and less impressive than it sounds here is why.

Credit unions need a secondary market –somewhere they can sell their mortgages to. It makes their loans cheaper, it manages risk and it ultimately allows our smaller industry to provide more mortgages to our members. Since Fannie and Freddie imploded credit unions have had a huge stake in insuring that whatever mechanism replaces them provides a cost effectively venue to sell their mortgages. Some people argue that the government is too involved in the mortgage market and shouldn’t be in the business of buying selling and guaranteeing mortgages. Others concede that Fannie and Freddie need to be reined in but wouldn’t mind seeing most of the current system kept intact.

With Washington in the grips of political paralysis increasingly it appears that the advocates of more moderate reform may win by default. Fannie and Freddie are back making gobs of money buying your mortgages and packaging them into Mortgage backed securities and the Senate was unable to reach a consensus on housing reform legislation meaning that the only entity that can really bring about any changes is the FHFA which is the conservator of the GSEs.

Currently Fannie Mae and Freddie operate independently of each other. They buy mortgages, bundle them together and sell them (Freddie Mac technically sells participation certificates instead of securities but they work in much the same way as MBS’s). With yesterday’s announcement the FHFA is putting more meat on the bones of its plans to combine the operations of the two GSEs.

It is proposing to offer a security with standard characteristics. As envisioned by the FHFA, there would still be no commingling of Fannie and Freddie mortgages in these pools and either Fannie of Freddie-but not both-would guarantee the securities. What you would have is a security with standard characteristic such as general loan requirements such as first lien position, good title, and non-delinquent status and a  payment delay of 55 days.

Done the road the FHFA envisions it being easy to swap these mortgages with existing GSE securities.   Remember FHFA wants to create a single GSE marketplace and that’s kind of hard to do when there are $4.2 trillion in Fannie and Freddie securities outstanding. So another goal FHFA is working towards is to create a unique standard GSE security s not so unique that can be traded with existing GSE securities.

Housing reform is one of the great pieces of unfinished business for Washington and the country. The FHFA is doing what it can to make changes around the edges but the country needs the type of big debate and big changes that only Washington can bring about. In the meantime this request for comment is worth keeping an eye on. Here is a link

Entry filed under: Mortgage Lending, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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