Housing reform proposal
Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, Representative Scott Garrett (R-NJ) has unveiled a new proposal to “reform the secondary mortgage market to ensure robust private investment in the U.S. mortgage market without a government guarantee.”
President Obama this week issued an executive order referred to as the “we can’t wait plan,” which alters the Home Affordable Refinance Program (HARP) by extending it and opening it to another one million potential homeowners.
Currently, Fannie and Freddie buy mortgages from lenders, repackage the loans and sale to investors as securities, charging fees to guarantee the debt, and under an alternative proposal recently introduced by the Federal Housing Finance Authority (FHFA), some bonds would lack a federal guarantee and investors would receive a higher return for their higher risk.
Rep. Garrett takes a similar approach but attempts to skirt the government guarantee, most likely in an effort to avoid penalizing taxpayers by holding them accountable for any defaulted loans under Obama’s plan or FHFA’s plan.
“Since taking control of the House in January, we have remained steadfast in our drive and determination to end the ongoing bailout of Fannie Mae and Freddie Mac, protect taxpayers from future bailouts, and encourage private capital to re-enter the secondary mortgage market,” Garrett said in a statement. “Now that we have taken the important step of introducing a series of bills to wind down the government-backed mortgage twins, it’s time to start thinking about the ways we can jumpstart the private market to step in once they’re gone. My proposal to reform the secondary mortgage market will facilitate continued standardization and uniformity, ensure rule of law and legal certainty, and provide investors with the standardization and transparency necessary to ensure that a deep and liquid market develops in the absence of Fannie and Freddie.”
Garrett’s secondary mortgage market reform plan:
1. Facilitate Continued Standardization and Uniformity of Mortgage Securitization
- Direct Federal Housing Finance Administration (FHFA) to create several categories of mortgages with uniform underwriting standards for each.
- Direct FHFA to develop standard and uniform securitization agreements and representations and warranties.
- Streamline the process for securities that meet the standard underwriting characteristics and securitization agreements to be sold to investors.
- Provide FHFA authority to ensure underwriting and securitization standardization compliance.
- Abolish risk-retention provisions included in Dodd-Frank.
2. Ensure Rule of Law and Legal Certainty
- Remove conflicts of interest between servicers and investors.
- Clarify the rules around the eligibility of obtaining second lien mortgages.
- Require mandatory arbitration on disagreements between investors and issuers on reps and warrants.
- Prevent regulators from unilaterally forcing investors to reduce the principal of loans they have invested in.
- Allow for the appointment of an independent third party to act for the benefit of investors in mortgage-backed securities.
- Standardize servicer accounting and reporting for restructuring, modification or work-out of loans used as collateral.
3. Provide Additional Transparency and Disclosure
- Increase the quality of the loan level information and the disclosures that investors can use to evaluate the value of the mortgages.
- Ensure investors have sufficient time to review and analyze disclosed information before making investment decisions.
- Increase pricing transparency by disclosing pricing history on securitization deals.
- Require the creation of an individualized marker for each loan within a securitization.
“Most, if not all, of my colleagues, Republican and Democrats alike, recognize the status quo is unsustainable,” noted Garrett. “The government-sanctioned duopoly of Fannie and Freddie is not only systemically dangerous to our economic security, it’s un-American. For too long the government’s manipulation of the housing market has crowded out private market participants at the expense of the American taxpayers.”
This isn’t the first plan to fix mortgage lending and housing, and it isn’t the last, and politicians continue to struggle with the way forward ranging from increasing government involvement to pulling out all government involvement and letting the housing market find its own bottom. America still has a rocky road ahead.