The news that Redwood Trust and JPMorgan Chase have entered into risk-sharing deals with Fannie Mae suggests that coming changes to the housing finance system will increase access to credit for qualified borrowers and help to restore a healthy housing market.
The deals reinforce Federal Housing Finance Agency director Mel Watt's recent pledge to infuse more private capital into the housing system. The firms will issue government-backed mortgage securities that transfer the first layer of credit losses from the GSEs to investors. These deals lessen risk to taxpayers while reducing guarantee fees, helping to lower mortgage costs for borrowers. The Mortgage Bankers Association believes that this risk-sharing model, if broadly adopted, could generate several meaningful benefits for the U.S. mortgage market.
By transferring some credit-loss risk to investors, the government-sponsored entities can significantly reduce their risk exposure in future economic downturns. This model could help resolve the concerns expressed by both Republican and Democratic lawmakers about the role of government in mortgage finance and the danger that taxpayers could be left on the hook for GSE losses.
Meanwhile, the GSEs' guarantee on the mortgage-backed securities remains intact under these types of transactions, despite the fact that GSEs have offloaded the bulk of their direct credit risk to private-sector companies. In this way, the deals allow the government to partner with the private sector on credit risk while protecting the government's role in providing the ultimate guarantee on the MBS. This guarantee will ensure that capital will continue to flow uninterrupted into the U.S. mortgage market, providing more affordable mortgages for borrowers at far lower risk to the taxpayer.
Expanding these programs by allowing private mortgage insurance firms to vie with one another to provide insurance against the first layer of credit-loss risk would create a more competitive market for mortgage finance. Moreover, permitting lenders of all sizes to enter into risk-sharing deals with the GSEs would allow smaller institutions to better compete with bigger banks.
This expanded playing field, combined with a commensurate guarantee fee reduction that reflects the greatly reduced credit risk to the GSEs, would likely bring added value to mortgages and potentially lower the costs to homebuyers.
Instituting a comprehensive and sustainable risk-sharing model has the potential to benefit taxpayers, homebuyers and lenders of all shapes and sizes. In addition, this model reinforces the fact that the FHFA has the power to change the GSEs' operating procedures and need not wait for explicit legislative action.
These recent risk-sharing deals, combined with other FHFA efforts including the single security, the common securitization platform and additional transparency and clarity on representation and warrant rules, show the agency’s commitment to strengthening the housing finance system and ensuring better access to credit for qualified borrowers. Together, these changes are a signal that the housing system is headed in a positive direction.
David Stevens is the president and chief executive of the Mortgage Bankers Association.