Twice in the same week two
entities published their recommendations on a new mortgage securitization process
that would turn mortgages into tradable securities. Their motivation is to
ensure that lending institutions are able to access the capital markets.
The need for a reset to MBS 2.0
is that the agencies responsible for purchasing and securitizing mortgages issued
by lending institutions, Federal Home Loan Mortgage Association (FHLMC) and
Federal National Mortgage Association (FNMA) were absorbed by the federal
government. This action was in response to the credit crisis, increasing late
payments and growing defaults by homeowners holding mortgages securitized by
FHLMC and FNMA. Both agencies, known government sponsored enterprises (GSE),
were public companies owned by shareholders before being taken over by the
federal government.
Prior to the credit crisis the
role of these agencies was to purchase qualifying mortgages, turn the mortgages
into securities, and guarantee the timely payment of principal and interest,
which were sold to investment banks who in turn sold them to investors. This
process was established in the late 1960’s and was designed to provider lending
institutions with a way to move the mortgages off their books and recapture the
capital lend to home buyers.
Congress and the Federal Housing
Finance Agency (FHFA) are struggling with finding a system to improve market
liquidity and address the potential risks causing market disruptions. The
ultimate solution will come from the federal government; particular focus will
be on correcting some of the shortcomings of the original model, such as:
·
Implicit guarantee
that the federal government would back the two GSE in the event of a crisis.
This certainly was true……
·
Marginal impact on
low to moderate income home buyers
·
Conflicts in regulations
and between public and private objectives
A new securitization model is a
critical step in the recovery and at a minimum, must ensure
·
Consistent,
nationwide supply of mortgage financing for residential mortgages to qualified
home buyers
·
Assistance to low
and moderate income homebuyers, i.e. subsidized mortgages
As I wrote in an earlier blog, the
ideal response to this opportunity will be a result of a collaborative effort
between Congress, FHFA and representatives from the Capital Market. This mix of
interests will ensure that each is represented and that the model will be a
“best practice” approach to the stated objectives. At this point the following
are some of the broad principles that should be addressed:
·
Securitization model that combines a federal
government and private industry guarantee that timely principal and interest
payments will be paid to investors on qualified mortgages
·
Transparency on the underlying
mortgages in any securitized pools or tranches sold to investors
·
Investment grade rating on the
securitized pools or tranches
I will
review the recommendations offered and explore this topic further in another
blog. Meanwhile, let me know your thoughts regarding..
What is your opinion about this?
Your ideas on the new securitization
model?
Are there other viable alternatives available?