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The CFPB's final Qualified Mortgage rule exacerbates our dependence on the GSEs and FHA, potentially harms a large swath of potential borrowers and severely handicaps the markets ability to effectively serve customers.
January 11 -
Securitization is essentially a financial production factory. Consistency in the manufacturing process, which minimizes defects and hence promotes investor interest in the product, would allow the business to prosper again.
January 3 -
How Do We Fix Our Housing Finance System? Part II: Rethinking Government's Role, Starting with FHA's The FHA in its current form could not handle an emergency backstop role but would have a much better chance if moved out of HUD and combined with Ginnie Mae and the remnants of Fannie and Freddie.
December 24 -
The role of the federal government in housing is the first question that needs to be answered, putting aside political rhetoric and preconceived notions about the subject.
December 17
Fifth in a series.
Congressional wrangling over fiscal issues looms large in shaping the eventual endgame solution for Fannie Made and Freddie Mac, and it does not bode well for reform this year.
That's a shame. With both government-sponsored enterprises turning a profit and the housing market showing signs of recovery, this would be the perfect time to finally address what to do with these housing agencies – were it not for the political realities. Alas, the ever-widening ideological split over government's role in markets, and the absence of political will to tackle this issue (unlike, say, gun control) will likely result in a continued stalemate on GSEs.
But that does not mean we cannot take steps to reshape the underlying structure of the securitization process, which does not depend on rebooting the GSE charter.
With the Federal Housing Finance Agency's initiatives to align various critical aspects of each agency's activities, such as representation and warranty policies, there is at least a good chance that the conservator will succeed where legislation has not. The GSEs' current status as twin guarantors is, after all, an accident and an anomaly. Before the government took them over, the existence of two separate agencies promoted overly aggressive competition in the market, leading to deteriorating credit standards. Differences in seller, servicing and other policies created inefficiencies for lenders and contributed to market idiosyncrasies like the longstanding differences in the pricing between the two agencies' mortgage-backed securities.
The agencies today in conservatorship provide a glimpse of what the future could be. The GSEs establish credit and servicing standards, and they aggregate, pool, and issue securities under the watchful eye of the FHFA. These core ingredients form the basis of a utility for the secondary market that would be inefficiently delivered other than by a single entity for a variety of reasons, including the need to maintain consistency in the securitization process. Separating securitization process redesign from the lightning-rod issue of the credit guarantee would allow progress in reforming housing in the near term.
The FHFA's current course appears to anticipate such an outcome. Continuing to realign core activities is the right approach this year, as in the absence of tangible policy it will, over time, effectively diminish the need for separate entities to provide these services. Even if their charters can't be merged without an act of Congress, the FHFA could integrate the securitization systems, master contracts, and other
This framework of a single entity responsible for a securitization platform could accommodate a variety of guarantee options which can await future debate. In the meantime, preparing for eventual structural wind-down of both GSEs and architecting alternative forms for a new entity should be a key part of the FHFA's agenda this year.
The public stigma attached to Fannie and Freddie in the wake of the mortgage crisis makes it extremely unlikely that they will be recapitalized in a form resembling either agency. And so far limited political will to define what the mortgage secondary market should look like leaves us with a pragmatic solution: Accelerate efforts to strip the agencies of their structural individuality as quickly as practicable.
Next: Reforming mortgage servicing practices.
Clifford V. Rossi is the Executive-in-Residence and Tyser Teaching Fellow at the Robert H. Smith School of Business at the University of Maryland.
