Mortgage Bankers Support GSE Bill

In September 2010, Wells Fargo Home Mortgage co-president Michael J. Heid testified before the House Financial Services Committee that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 intends to address flaws in the government-sponsored enterprise model by aligning the interest of all stakeholders. He was testifying on behalf of the Housing Policy Council of the Financial Services Roundtable.

“Stronger underwriting standards and risk retention requirements will make the abuses that occurred in the past unlikely to be repeated,” Heid stated.

He said that the council proposes to pass on Fannie’s and Freddie’s credit enhancement or guarantee functions to a handful of “mortgage securities insurance companies,” or MSICs. Heid explained that four to eight MSICs would be federally chartered and supervised like federally regulated financial institutions.

A similar proposal has been made in legislation introduced by Rep. John Campbell (R-Calif.) and Rep. Gary Peters (D-Mich.).

HR 1859, the Housing Finance Reform Act of 2011, seeks to ensure liquidity in the conventional mortgage market during all economic cycles while limiting the government’s exposure, according to a copy of the bill. It aims to encourage more private capital to fund the secondary market.

The bill also seeks an orderly wind down of Fannie Mae and Freddie Mac.

In place of the two government-controlled enterprises would be housing finance guarantee associations. The associations can be organized as either corporations, mutual associations, partnerships, limited liability corporations or co-operatives. Other business structures will also be considered. Financial institutions can take in interest in the guarantee associations.

The associations would be allowed to acquire and trade conventional mortgages for the purpose of creating a secondary market. They can also securitize the loans and provide guarantees without registration — though they would be required to provide data such as loan-to-value ratios, debt-to-income ratios and payment histories. Government guarantees would be provided for the principal and interest payments on the bonds.

The government guarantee would kick in if the associations were placed into conservatorship or receivership and unable to make the payments themselves.

Mortgage Bankers Association Chairman Michael D. Berman weighed in on the bill.

“The bipartisan legislation introduced by Congressmen Campbell and Peters to reform our secondary markets closely mirrors the proposal of MBA’s Council on Ensuring Mortgage Liquidity, which was the first to put forward a comprehensive blueprint for the future of our housing finance system,” Berman said in a statement.

Maximum loan amounts at the companies would be limited to the greater of 150 percent of the average U.S. home price or 150 percent of the local median price.

The associations can’t, however, originate or service loans. They also can’t guaranty non-agency loans, speculate in the market or purchase loans from an institution that has a voting interest in the company. Other prohibited activities include the purchase loans with LTV ratios in excess of 80 percent unless the seller maintains a 10 percent participation in the loan, a repurchase agreement is in effect or mortgage insurance is obtained.

The bill seems to protect smaller lenders by prohibiting the proposed agencies from providing better terms to bigger-asset lenders than smaller lenders. But minimum standards for sellers are ok, and volume-based guarantee fees are also acceptable.