Upfront risk sharing of government sponsored enterprises (GSEs) would invite the return of private capital to the mortgage market, according to a concept paper released by the Mortgage Bankers Association (MBA).
The concept paper suggests that Fannie Mae and Freddie Mac have caused the government’s involvement in the mortgage market to balloon to “unhealthy proportion.”
As a result, this has crowded out the private sector and has hindered competition in the market, however, MBA assures that immediate steps can be taken by the Federal Housing Finance Agency (FHFA) to bring private capital back.
To entice private capital into the mortgage market, MBA urges FHFA should require the GSEs to offer risk sharing options to lenders at the “point of sale,” rather than at the back end with loans that are already on GSEs’ balance sheets.
“By requiring the GSEs to offer programs such as up-front risk sharing between lenders and the GSEs, the FHFA would be taking a big step in the right direction,” said MBA President and CEO David Stevens.
Ultimately, this kind of upfront risk sharing would be putting private capital, not the taxpayers, in the first loss position, according to Stevens. It would also allow lenders of all sizes to compete, in turn driving down costs for borrowers.
MBA’s concept paper also notes that requiring GSEs to accept loans with deeper levels of credit enhancement, in exchange for reductions in guarantee fees and other loan level charges, would also shift risk into the private sector.
“This single step will begin the process of bringing greater amounts of private capital into the mortgage market, thus reducing taxpayers’ exposure to mortgage credit risk,” writes MBA.
The risk sharing concept paper is the second piece of a five-part plan recommending immediate steps FHFA can take to bring back private capita into the mortgage market.
Earlier this month, MBA recently released another concept paper, Key Steps on the Road to GSE Reform, suggesting FHFA align securities into one fungible currency in order to “operationally align” the GSEs.
Written by Jason Oliva