MBA Proposes Overhaul of Secondary Security Market

MBA introduced its policy proposal in a paper called Recommendations for the Future Government Role in the Core Secondary Mortgage Market. It is the byproduct of close to a year's work by the 23-member task force MBA established last year to address the liquidity crisis.

The most obvious stumbling block to the MBA's proposal would be the increased government support--in this case, for the secondary market. The government's stepped up presence in the economy over the course of this recession has been a sore spot for many constituents and Congress people. Yet MBA says it is essential.

"The government has an important, limited role to play to ensure a stable flow of funds for mortgages," says Michael D. Berman, MBA's vice chairman and chair of the Council on Ensuring Mortgage Liquidity, in a prepared statement. "Rebuilding the secondary market is critical to restoring liquidity and confidence." MBA was not able to return a call to GlobeSt.com in time for publication.

The new line of MBS proposed by MBA would have two components: a loan level guarantee provided by a privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGEs) and a security-level, federal government-guaranteed wrap. The wrap would be an explicit government guarantee on the credit risk of these mortgage securities, similar to that on a Ginnie Mae security.

The government guarantee would support only "core" mortgage products with well-understood, well-documented risk characteristics, MBA said. New products would be proposed by the MCGEs, recommended by the government guarantor and would require approval from a regulator.

Fannie Mae and Freddie Mac would support these new structures. Specifically, their infrastructure--technology, human capital, standard documents and relationships--could be used as the foundation for one or more of these new entities, MBA said. Not surprisingly, supporters of the GSEs--particularly in the multifamily space--are adopting a wait-and-see stance on MBA's proposal.

The suggested structure of a public utility model is not a surprise, David Cardwell, vice president of capital markets and technology of the National Multifamily Housing Council, tells GlobeSt.com. "That model has been discussed by a number of groups."

Still, though, without more details from the MBA it is difficult to judge the proposal's merits, he continues. "As it is laid out right now, it is in broad terms. It is hard to fully understand the implications for the multifamily side," although clearly a robust secondary market is important to it.

"There are some questions that the proposal raises with regard to affordable housing goals and public purpose that need to be vetted." Cardwell says he has not spoken with the NMHC's membership about the proposal yet.