Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, has presented a proposal that he says will ‘reform the secondary mortgage market to ensure robust private investment in the U.S. mortgage market without a government guarantee.’
A key element of the Garrett proposal is to abolish risk-retention provisions included in the Dodd-Frank Act. The proposal, as announced by Garrett, makes no additional attempt to repeal or rewrite the Dodd-Frank Act. However, Garrett introduced a new player to the environment by calling for ‘the appointment of an independent third party to act for the benefit of investors in mortgage-backed securities.’
Garrett's proposal complements previously introduced Republican legislation designed to wind down Fannie Mae and Freddie Mac. In his plan, Garrett involves the Federal Housing Finance Agency (FHFA) to encourage the private-label market by defining mortgage categories with uniform underwriting standards and developing a new set of standard and uniform securitization agreements and representations and warranties. Garrett also envisions the FHFA having the authority to ensure underwriting and securitization standardization compliance.
Furthermore, Garrett's proposal prevents federal regulators from ‘unilaterally forcing investors to reduce the principal of loans they have invested in.’ The proposal also calls for disclosing pricing history on securitization deals and creating ‘an individualized marker for each loan within a securitization.’
‘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,’ says Garrett.