Fannie Mae-No Politics (FNMA)

[lushka]

Interesting article ,from Housing Wire on Monday,April 21,2014. http://www.housingwire.com/articles/29733-rep-delany-time-to-end-governments-role-in-setting-price-of-mortgage-finance (see below)

In January, U.S. Rep. John K. Delaney, D-Md., announced a plan for housing finance reform.

Partnering with fellow representatives John Carney, D-Del., and Jim Himes, D-Conn., the Delaney-Carney-Himes proposal calls for the use of private sector market forces to price risk while providing the security of a government guarantee behind the program.

Delany details the plan in an editorial posted Sunday on the Financial Times website, ft.com.

Delany says that with the government conservatorship of Fannie Mae and Freddie Mac, “The government now backs roughly 90% of all new mortgages in the county.”

Because of the government’s massive stake in the market, Delany says that the government sets the price of mortgage finance, “probably at the wrong level.”

Delany cites the government’s “mispricing of risk” as a significant contributor to the financial crisis and says, “We have ample evidence of what happens when the government distorts the massive mortgage market.”

Delany says that the bipartisan Senate Johnson-Crapo bill authored by Chairman Tim Johnson, D- S.D., and Sen. Mike Crapo, R-Idaho, of the Senate Committee on Banking, Housing, and Urban Affairs, is likely to stall without support in Congress because “there are legitimate concerns that it would leave the government with an outsize role in the housing market – and that it could make mortgage finance unaffordable for some households.”

Delany says that the plan he authored with Carney and Himes devises a system that combines the government’s financial muscle with the market’s ability to price risk. He calls this “the cornerstone” of the proposal.

“Under our plan the holders of mortgage-backed securities would absorb losses of up to 5% of their value,” Delany writes. “The remaining 95% would be covered by insurance, which would be provided jointly by the government and the private sector.”

Delany says that their plan would require at least a 10th of this insurance coverage to be purchased from private sources.

“The portion supplied by the government would have the same price as the private component, and it would insure against precisely the same risks,” he says. “Consequently the market – rather than government agencies – would determine the price for insuring mortgage risk, eliminating the damaging distortions that exist today. At the same time, the government would ensure that the market retained enough capacity to provide affordable homes for American households.”

Delany says that over time, their plan would give private capital a greater role, and decrease the government’s share of the reinsurance market, “since the private market, bearing the same risk and earning the same return, would have no incentive to use the government, save for lack of capacity.”

Delany says that Fannie and Freddie could “conceivably return to the private sector and insure mortgages under our scheme,” with the stipulation that the GSEs would receive no special deal from the government.

“Our plan would ensure that they do not return to monopoly status,” he says. Delany calls this “essential for effective reform.”

Delany calls their plan a “pragmatic” one because it gives the government a smaller role than Johnson-Crapo would, but a larger role than it would have under the PATH Act, sponsored by Financial Services Committee Chairman Jeb Hensarling, R-Texas.

“Over time the government needs to get out of the mortgage finance market that it has long dominated,” Delany says. “But it must do so with care, to ensure that creditworthy American households have access to the affordable housing loans they need. (Our plan) combines a gradual transition to private finance in the housing market with an immediate end to the government’s counterproductive role in setting the price of mortgage finance.”

Delany says “we desperately need to reform the mortgage finance system for the good of our economy, our taxpayers and the stability of the global financial system. Until we take important steps on housing reform, we will remain haunted by the ghosts of 2008.”

Representatives John K. Delaney, D-Md., John Carney, D-Del., and Jim Himes, D-Conn., are putting together a housing finance reform proposal that uses private sector market forces to price risk while providing the security of a government guarantee behind the program.

"We believe we will get bipartisan support," Delaney told HousingWire. "It’s a complicated bill so we wanted to get it out so it can be looked at thoroughly."

Delaney said he plans to introduce legislation based on the proposal in a few months, after getting input from colleagues and industry leaders.

"This arose from an amendment I was proposing during the final markup for the PATH Act, but the chairman (Rep. Jeb Hensarling, R-Texas) was complimentary about it to the point I thought we should explore doing this on its own," Delaney said.

(View the proposal discussion archived video here.)

Delaney said he believes the proposal he is crafting will create a housing finance system that is fair to borrowers, lenders, and taxpayers.

"I believe government should be adding liquidity and capacity to the housing market but not taking on additional risk," he said.

The core of the proposal allows the government to expand the capacity of housing finance while allowing the private sector to price all of the risk. The reform package also is supposed to create incentives for private capital’s market share in housing to grow over time.

Most importantly, for those in the market, Delaney said it creates a path for Fannie Mae and Freddie Mac to be sold as independent companies without any government support or monopoly status.

The Delaney-Carney-Himes housing finance proposal creates a structure that enables the government to significantly expand the availability of capital in the insurance market, while ensuring the mortgage market is open and efficient – with private capital participating in the market and pricing all of the risk.

The plan adds discipline to the mortgage market, creates meaningful paths and incentives for private capital to flow into the mortgage market, and ensures that the mortgage market benefits from the liquidity provided by government participation.

According to Delaney, this structure creates a unique public-private partnership mechanism whereby private "first loss" capital of up to 5% is required in all mortgage securitizations, and the government – acting through Ginne Mae – in partnership with private capital will provide reinsurance of up to 95% of any mortgage securitization.

Specifically, Ginnie Mae will provide reinsurance and prospectively contract with private reinsurance companies to share in the government’s reinsurance policy. Both the private reinsurance carrier and the government will receive the exact same pricing and bear the exact same risk.

"To ensure a stable housing finance system, we must move past the current state to a new system that engages more private sector capital and private sector pricing of risk in partnership with an explicit government role in the provision of stabilizing liquidity to the market – this bill does that. Chairman Hensarling has shined an important spotlight on housing reform and understands, deeply, how important this debate is to the economy and our fiscal future," Delaney said. "There are a lot of good ideas out there -- I think this one strikes the right balance between public and private sector involvement in the housing market."

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email [e-mail] to buy additional rights. http://www.ft.com/cms/s/0/1d647a54-bb32-11e3-948c-00144feabdc0.html#ixzz2ziWzuY00

Article from Finnacial Times on Sunday by Delaney

A pragmatic plan to free the mortgage market from Washington
By John Delaney
Combine government financial muscle with the market’s ability to price risk, says John Delaney
A for sale sign hangs outside a property©Bloomberg
Since the collapse of Fannie Mae and Freddie Mac, American housing finance has essentially become a nationalised industry. The government now backs roughly 90 per cent of all new mortgages in the country, mainly through the failed mortgage finance companies that are in federal “conservatorship”. Washington therefore sets the price of mortgage finance – probably at the wrong level.
We have ample evidence of what happens when the government distorts the massive mortgage market. A significant contributor to the financial crisis was the government’s mispricing of risk, and the resulting perception that mortgages were effectively as safe as US Treasuries. To make matters worse, there is little evidence that these government subsidies substantially improved home ownership rates or affordability.
A bipartisan proposal to wind down Fannie and Freddie has been introduced in the Senate. It would provide government backing for new mortgages in return for stricter underwriting standards, a requirement that the private sector absorb losses of up to 10 per cent of the value of the loans, and the creation of an industry-funded mortgage guarantee fund to further shield taxpayers from the cost of any bailout. But without support in Congress, this proposal is likely to stall. There are legitimate concerns that it would leave the government with an outsize role in the housing market – and that it could make mortgage finance unaffordable for some households.
The sheer size of the mortgage book currently underwritten by taxpayers makes it unlikely that the government could retreat quickly from the housing market without causing widespread disruption. But the harmful distortions that government involvement causes can be removed straight away. The trick is to devise a system that combines the government’s financial muscle with the market’s ability to price risk. That is the cornerstone of a proposal that I have put forward with two Democratic colleagues in the House of Representatives, John Carney and Jim Himes.
Under our plan the holders of mortgage-backed securities would absorb losses of up to 5 per cent of their value. The remaining 95 per cent would be covered by insurance, which would be provided jointly by the government and the private sector. Our rules would require at least a 10th of this insurance coverage to be purchased from private sources. The portion supplied by the government would have the same price as the private component, and it would insure against precisely the same risks. Consequently the market – rather than government agencies – would determine the price for insuring mortgage risk, eliminating the damaging distortions that exist today. At the same time, the government would ensure that the market retained enough capacity to provide affordable homes for American households.
Over time our plan would give private capital a greater role, pushing down the government’s share of the reinsurance market – since the private market, bearing the same risk and earning the same return, would have no incentive to use the government, save for lack of capacity.
Fannie and Freddie could conceivably return to the private sector and insure mortgages under our scheme. But they would receive no special deal from the government. This is essential for effective reform. Our plan would ensure that they do not return to monopoly status.
Over time the government needs to get out of the mortgage finance market that it has long dominated. But it must do so with care, to ensure that creditworthy American households have access to the affordable housing loans they need.
Ours is a pragmatic plan. It gives the government a smaller role than that advocated in the Senate, but a larger one than has been suggested in the House. It combines a gradual transition to private finance in the housing market with an immediate end to the government’s counterproductive role in setting the price of mortgage finance.
We desperately need to reform the mortgage finance system for the good of our economy, our taxpayers and the stability of the global financial system. Until we take important steps on housing reform, we will remain haunted by the ghosts of 2008.
The writer is a Democratic congressman for Maryland
RELATED TOPICS
United States of America