In an attempt to save the long frozen secondary mortgage market, the Mortgage Bankers Association has proposed a new framework to ensure liquidity in the core mortgage market while reducing taxpayer liability.
“It’s now been more than two years since the secondary mortgage market collapsed,” said Michael D. Berman, MBA’s Vice Chairman and Chair of the Council on Ensuring Mortgage Liquidity, in a release.
“Rebuilding the secondary market is critical to restoring liquidity and confidence. The government has an important, limited role to play to ensure a stable flow of funds for mortgages.”
The MBA wants to create a new line of mortgage-backed securities (MBS) with two components, including a loan level guarantee from a 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 based on the credit risk of the underlying securities, similar to that in place on Ginnie Mae securities.
A security-level credit guarantee backstop would rely on security-level risk-based premiums paid into a federal insurance fund and loan-level guarantees provided by MCGEs.
The government guarantee would only support “core” mortgage products with “well-understood, well-documented risk characteristics,” though new products could be proposed by the MCGE with approval from a regulator.
The current government-sponsored entities, Fannie Mae and Freddie Mac, would likely serve as a foundation for one or more the MCGEs, including use of technology, human capital, and infrastructure.
Fannie Mae and Freddie Mac broke down about a year ago after being hit by surging delinquencies and related losses.