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A Simpler Path to Housing Finance Reform?

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WASHINGTON — A former top regulator of Fannie Mae and Freddie Mac wants to abandon the development of the common securitization platform and use the existing Ginnie Mae platform to issue government-guaranteed mortgage-backed securities.

Edward DeMarco, a former director of the Federal Housing Finance Agency, argues in a new paper that utilizing Ginnie would make for a smoother transition to a new system.

"We believe that using Ginnie Mae's platform and world-recognized nameplate as a U.S. government backstop guarantor of MBS, but with private capital upfront, provides an easy transition" to a reformed secondary market, he said.

Under the plan, Ginnie would still securitize Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans in addition to those of the government-sponsored enterprises.

The plan, from DeMarco and Michael Bright, director of the Milken Institute's Center for Financial Markets, would encourage private firms to put capital upfront via credit risk transfers. Fannie and Freddie have already experimented with such transfers, which many observers see as a critical step toward a new housing finance system.

"This structure would replace the failed duopolistic GSE system with one of competitive private insurers, a vibrant market for mortgage credit risk, ownership structures that require lenders to have some skin in the game, and appropriate government standard-setting and oversight to ensure a deep and liquid MBS market," according to the paper, which was issued last week.

The plan envisions the FHFA as the overseer of the new secondary market structure, while Ginnie would be moved out of the Department of Housing and Urban Development and re-established as a separate government corporation with authority over its budget, hiring and compensation.

David Stevens, the president and chief executive of the Mortgage Bankers Association, said he sees some "interesting similarities" between the Milken plan and the GSE reform proposal advanced by Gene Sperling, former director of the National Economic Council; the economist Mark Zandi, Barry Zigas of the Consumer Federation of America, mortgage securitization pioneer Lewis Ranieri and Urban Institute senior fellow Jim Parrott.

Both strive to offer simpler solutions and build on the current infrastructure as opposed to creating new government entities and both would give the FHFA power over an expanded Ginnie Mae.

Both proposals call for "first-loss risk sharing and preserve the cash window," Stevens said, so small lenders can continue to sell their loans for cash.

"It clearly reflects there is some serious thinking around resolving the GSE conservatorships. I think it is good timing with the new Congress coming in next year and new White House. It really broadens the debate," Stevens said in an interview.

Yet the DeMarco-Bright plan would eliminate the common securitization platform, while the Parrott, Zigas and Ranieri plan would not.

Under the DeMarco-Bright plan, Fannie and Freddie would be reconstituted as lender-owned mutual. Lenders would also be required to have "skin in the game" and support a mortgage insurance fund.

"By transforming Fannie and Freddie from GSEs into mutually owned and operated insurers, lenders that are familiar with selling loans to Fannie and Freddie will have the choice to continue to do so," the paper says. "But to align incentives properly, these lenders will become the owners of the mutual. Moreover, the charters would not be exclusive. Lenders could be members at either, both, or neither mutual."

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