The functions of Fannie Mae and Freddie Mac should be divided among a mix of public- and private-sector entities, according to the Financial Services Roundtable's Housing Policy Council (HPC). In prepared testimony delivered to the House Financial Services Committee, Wells Fargo Home Mortgage Co-President Mike Heid, speaking on behalf of the HPC, says privately capitalized firms would take over the credit-enhancement functions of the government-sponsored enterprises.
Heid will testify today as part of the House committee's hearing on the future of housing finance.
The HPC recommends the creation of mortgage securities insurance companies (MSICs) – entities that would purchase conventional mortgages from originators, guarantee principal and interest payments on securities, and charge originators a fee for guarantees. The MSICs would be supervised by, but not backed by, the federal government. Heid says the HPC envisions between four and eight MSICs.
‘The greater the number of MSICs, the better insulated the housing finance market would be from the failure of any one MSIC,’ he says. ‘On the other hand, too many MSICs – with different underwriting systems and procedures – could be overly burdensome to lenders, particularly smaller lenders.’
Although the government would not provide a guarantee on MSICs themselves, it would provide an explicit guarantee on MSICs' securities.
‘The challenge we face is designing a secondary market system that ensures a steady flow of reasonably priced mortgages to borrowers while limiting the exposure of taxpayers,’ Heid says. ‘Our proposal addresses this challenge by putting several layers of private capital in front of the federal guarantee, andâ�¦ subjecting MSICs to 'world class' regulation.’
Three layers of private capital would cushion taxpayers from losses: private mortgage insurance or other credit enhancement on the loan, shareholder equity in the MSIC and a reserve that would be established by fees paid by MSICs in exchange for the government's guarantee on the securities.
The HPC also supports placing a ‘special assessment’ on MSICs. The assessments would allow the government to recoup losses in the event that all private resources are exhausted and the government has to make payments under its guarantee.
‘Thus, the system we propose would operate much like the federal Deposit Insurance Fund does today,’ Heid says.
To draw in capital, the HPC recommends authorizing – but not requiring – banks to invest in MSICs. Heid says received feedback from investment bankers and other firms indicates investors would consider capitalizing MSICs, provided they could achieve a ‘reasonable’ return on their investment.
The MSICs' regulator would set capital and liquidity standards, mortgage loan underwriting standards and loan limits, according the HPC recommendation.