Since 2008, the two government-sponsored enterprises charged with cultivating the secondary mortgage market have been under public conservatorship. The Mortgage Bankers Association has proposed an ambitious plan for transitioning those entities to a long-term structure that would retain—as a last resort—the option of a taxpayer bailout. MBA’s plan, while appearing solid on paper, would benefit from support from non-financial sectors.
In a glossy, 60-page behemoth, MBA meticulously lays out its vision for “a new government-guaranteed secondary market ‘end state.’” The system would involve charted guarantor entities that would provide for the securitization of eligible single-family and multi-family mortgage-backed securities. The two existing GSEs, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) would become the initial guarantors, according to MBA. Other entrants could apply for a charter from the relevant regulatory authority, probably the Federal Housing Finance Agency (FHFA) or a successor entity. MBA views the chartered businesses operating similarly to regulated utilities owned by private shareholders. Buttressing the guarantors would be a mortgage insurance fund (MIF), paid for through guarantor premiums. Only upon MIL failure would the full faith and credit of the federal government come in, via a taxpayer bailout.
It’s hard to find any faulty logic or strained reasoning in MBA’s recommendations. But the implied assumption running throughout its proposal is that business structures that have succeeded in other areas—in utilities, for example—can also succeed in the mortgage realm. Those comparisons are not always apt. For instance, utilities are normally regionalized, and the demise of any one of them poses little threat to the macro economy. Mortgages are much more fungible, and some are issued by large, national players—the “too big to fail” crowd.
In any event, if respected academics and economists end up supporting MBA’s proposal, it will likely have a much easier time getting through Congress. Whether this current bunch of lawmakers is capable of enacting such a wide-ranging reform is a whole other debate. At least it would stand some chance of being bipartisan.