I have been in the real estate finance industry for over 25 years and my company has been active in the commercial mortgage-backed securities arena as an investor, lender, issuer of securities, servicer and special servicer. We’ve also been an active Fannie Mae, Freddie Mac and FHA multifamily lender and servicer.
The current housing crisis has prompted a fundamental rethinking of the part played by the government in the housing finance system. Certainty of the federal role in the housing market is necessary to encourage private capital to return.
Several factors contribute to the current uncertainty and lack of private capital in the housing market. Ongoing uncertainty on risk retention rules, GSE reform, and the future of the conforming loan limits raises questions about the consistency of national housing policy. While the administration’s recently released white paper on reforming the housing finance system was an important first step, much work lies ahead and we must act in a deliberate, coordinated and comprehensive fashion.
MBA firmly believes that a carefully crafted government role can serve to maintain the nascent housing market recovery and preserve the availability of affordable 30-year fixed-rate mortgages. To this end, in 2008, MBA convened the Council on Ensuring Mortgage Liquidity, which I chair. This 23-member council was made up of industry practitioners from the single-family, multifamily and commercial sectors of the real estate finance industry. Its mission was to look beyond current market conditions, to what a properly functioning secondary mortgage market should look like. In September 2009, MBA first articulated a plan, outlined in my written testimony, which is based on three key principles:
First, secondary mortgage market transactions should be funded with private capital. Private capital should take two forms: capital that takes on credit risk on mortgages, and capital from bond investors that take on interest rate risk.
Second, to promote uninterrupted market liquidity for the core mortgage market, the government should provide an explicit, but limited, credit guarantee on a class of mortgage-backed securities backed by “core,” well-underwritten single-family and multifamily mortgage products. This guarantee should not be free, but should be financed with risk-based fees to be deposited into an FDIC-type insurance fund.
Third, taxpayers and the system should be protected through limits on the mortgage products covered, permissible activities, portfolio size and purpose, coupled with strong risk-based capital requirements and risk-based payments into a federal insurance fund.
This plan has largely been mirrored in option three of the administration’s white paper, as well as in plans proposed by other industry practitioners and trade groups.
Let me be clear, MBA’s plan is not an extension of the current status quo. It focuses on core products and enacts five significant lines of defense to protect taxpayers. We believe that once the transition is complete, the government footprint in the real estate market would be much smaller than today.
The framework we have proposed is not intended to be the entire market. It’s meant to focus on a narrowly defined set of core mortgage products that are essential to have available through all market conditions. Our proposal recognizes the need for a wider array of products through a re-emergence of the private market, including private label securities and covered bonds.
We must also ensure that the transition from the current system to a new model is as seamless as possible. As taxpayers, we have a $150 billion investment that we need to protect. Measures such as focusing the GSEs on a narrow range of mortgages and winding down their portfolios can be undertaken now. While we continue to rely on the GSEs as we identify a clear path forward, we must work to remove uncertainty and ensure that the GSEs’ resources are of service now and through the transition. The challenge of retaining and recruiting talented professionals cannot be understated. Without their talent, our housing finance system would be further at risk.
MBA’s recommendations combine an acknowledgement that only a government guarantee can attract the depth and breadth of capital necessary to support the market during times of economic stress, with a reliance on private capital, insistence on multiple layers of protections for taxpayers and a focus on ensuring a competitive, efficient secondary mortgage market.
Michael Berman is chairman of the Mortgage Bankers Association.
