The current housing and economic crisis has left the federal government with an enormous and, some economists argue, ultimately unsustainable role in the secondary mortgage market. The implicit guarantee given to Fannie Mae and Freddie Mac, as government-sponsored entities, became explicit when the government moved to keep them from collapsing in late 2008. Since then, they have continued to perform something close to their traditional role, buying mortgages and holding some while selling others on the secondary market as mortgage-backed securities.
But this continued ability has come at a cost. According to the Federal Housing Finance Agency, Fannie Mae and Freddie Mac's conservator and regulator, the federal government invested $1.2 trillion in the U.S. mortgage market by the end of September 2009. The Treasury has invested $96 billion in the two firms as capital through the preferred stock program that came with the rescue, and it has purchased $181 billion in the mortgage-backed securities. The Federal Reserve has purchased $813 billion in securities and $131 billion in debt obligations.
"These efforts have had a positive impact on mortgage rates," FHFA Acting Director Edward DeMarco told a meeting of New England Mortgage Bankers in Providence, R.I., on Oct. 1. "Rates on 30-year mortgages dropped below 5% for nearly three months earlier this year before rising, and rates now are hovering around 5%."
But that has left the question open as to what sort of structure a future market would need to have and, past an agreement that both better underwriting of mortgages and better education of borrowers is essential, that conversation has not yet begun.
Whatever structure it takes, DeMarco argued before the bankers, it has to be one that is resilient and flexible enough to bring together the $12 trillion mortgage market in the U.S. with the resources of global capital markets to supply that volume of financing to America's homebuyers and renters.
"Since the global marketplace is not directly connected to any of those individual transactions, we need efficient conduits between local mortgage lenders, including mortgage bankers, and global capital markets to ensure that families have access to stable, low-cost credit to finance their dream of homeownership," he said.
"In my view, the place to start the discussion centers on what the nation's goals are for the secondary mortgage market and what is the appropriate role of government in achieving those goals," he added. "These questions should come before discussion of particular companies or institutional arrangements. As we already know from proposals that have been put forward, there are multiple options for the future of the secondary mortgage market. Whatever the outcome of the policy-making process, the country needs a vibrant, liquid and efficient secondary mortgage market to support both single-family and multifamily mortgage finance. I am confident we will find the answers to the questions before us, building upon the strengths of the existing system to create a more resilient system going forward."
While few credit union leaders have engaged the question directly, credit union mortgage lenders have a definite stake in the outcome of that conversation.
"The key thing to know about the secondary mortgage market from a credit union perspective is that it's been working for them," said Mike Schenk, CUNA vice president for economics and statistics. In prior years, credit unions have kept more than 75% of the mortgages they issue on their own books, Schenk noted. But beginning last year and into this year, they sell more than half of them. In the current interest rate environment, it seems likely they would continue to do so while retaining the loan servicing, he added.
Many of those sales have been to Fannie Mae and Freddie Mac because of their traditional interest in very sound underwriting.
But notwithstanding DeMarco's reluctance to discuss "companies and institutional arrangements," the Mortgage Bankers Association convened a council on ensuring mortgage liquidity to study what structure the secondary mortgage market could adopt. The council then published "Recommendation for the Future Government Role in the Core Secondary Mortgage Market" as a jumping off point for the discussion.
In the council's recommendation, the role Fannie Mae and Freddie Mac have taken in the market would instead be filled by private firms that would be federally chartered and regulated and narrowly specialize in the purchase of mortgages and packaging them for sale as MBS.
These "mortgage credit guarantor entities" would package the mortgages they bought into a new kind of security that would have a "government wrap" like the securities currently backed by the Government National Mortgage Association. They would also be backed by privately owned, government-chartered and regulated mortgage credit guarantor entities (MCGEs).
The government guarantee would be conceptually similar to the Ginnie Mae model and would guarantee timely interest and principal payments to bondholders, would explicitly carry the full faith and credit of the U.S. government and would be supported by a federal insurance fund, fueled by risk-based fees charged for the securities at issuance and on an ongoing basis, the council said. "The MCGEs would in turn rely on their own capital base as well as risk-retention from originators, issuers and other secondary market entities, such as mortgage insurers. The credit risk of the underlying mortgages would be removed from the securities issued, while the interest rate risk would remain with the security investor."
Should it prevail, the MBA plan would replace two giant players in the secondary mortgage market with multiple smaller ones-few of which may have any knowledge of or regard for credit unions. Although the plan suggested that all the current relationships with Fannie Mae and Freddie Mac, including those of credit unions, be preserved in the new market organization.
"Every effort should be made to transfer existing origination, servicing and other industry relationships from the GSEs to the new MCGEs so as not to strand originators and servicers with ties to the existing GSEs," the council recommended. "Historical performance data and other information should be made available to originators, the MCGEs, regulators, rating agencies, investors and providers of credit support to enhance the efficiency of the market."