The Mortgage Bankers Association (MBA) has released a new paper outlining a proposed framework for a refined government role in the secondary mortgage market.
The paper, ‘Recommendations for the Future Government Role in the Core Secondary Mortgage Market,’ is the result of work by MBA's Council on Ensuring Mortgage Liquidity, a 23-member task force.
The centerpiece of MBA's recommendation is the creation of a new line of mortgage-backed securities (MBS). Each security would have two components – a loan-level guarantee provided by privately owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE), and a security-level, federal government-guaranteed wrap.
The wrap would be an explicit government guarantee focused on the credit risk of these mortgage securities, the MBA says, comparing it to guarantees on Ginnie Mae securities. Fannie Mae and Freddie Mac's infrastructure, including their technology, human capital, standard documents and relationships, could be used as the foundation for one or more MCGE, the trade group says.
"Rebuilding the secondary market is critical to restoring liquidity and confidence," comments Michael D. Berman, chair of the Council on Ensuring Mortgage Liquidity. "The government has an important, limited role to play to ensure a stable flow of funds for mortgages."
The government guarantee is not intended to support the entire mortgage market, but only those products needed to keep the secondary market for core mortgage products liquid and functioning, even during times of extreme market stress, the MBA contends.
Under the proposal, government securitization guarantees would support only "core" mortgage products with well-understood, well-documented risk characteristics. New products would be proposed by the MCGEs, recommended by the government guarantor and would require approval from a regulator.
MBA President and CEO John Courson says the group's proposed structure is not the only viable framework but that he believes the recommendations ‘represent a workable approach, balancing the government's ability to ensure liquidity, with the need to protect taxpayers from the credit and interest-rate risk inherent in mortgage finance."