If the Obama administration was looking to comments filed by more than 300 individuals, banks, trade groups and other companies for guidance in crafting a future for the government-sponsored enterprises, it had better have a Plan B.
About the only common theme in the letters is the utter lack of consensus among various players. In the nearly two years since the government seized Fannie Mae and Freddie Mac, the coming debate promises to be a black hole.
The proposals range from abolishing Fannie and Freddie to nationalizing them, creating a mortgage insurance fund to back mortgage-backed securities or just returning the GSEs to the way they were before the crisis. Other suggestions included creating a covered bond market to allow banks to issue mortgage-backed debt to finance loans, or allowing each of the 12 Federal Home Loan banks to securitize loans.
The disparity found in the letters is likely to be echoed in a GSE conference the administration is planning for Aug. 17, which will feature academics, industry groups, consumer representatives and others.
In announcing the conference on Tuesday, the administration reiterated its commitment to deliver a plan to Congress by January. But what plan ultimately takes shape is far from clear.
"The federal government faces a difficult balancing act in supporting a stable, well-functioning mortgage market," wrote John Gibbons, executive vice president of capital market at Wells Fargo Home Mortgage. "On the one hand, it must ensure a stable flow of mortgage credit in a variety of economic environments, which generally requires some sort of government guarantee. At the same time, it must ensure that housing prices are sustainable, and do not get out of line."
Wells threw its weight behind a proposal from the Mortgage Bankers Association and other organizations that calls for the creation of a small number of federally chartered privately owned mortgage conduits. Those companies would buy loans from the primary market and deliver them into a federally guaranteed mortgage-backed security.
In exchange for that guarantee, the conduits would pay a risk-based fee that would be used to establish an insurance fund, similar to that of the Federal Deposit Insurance Corp.
"The specific framework that we propose addresses the major weaknesses of the GSE model while preserving most of its benefits," Gibbons wrote. "It reduces moral hazard by guaranteeing the conduit's MBS but not its debt, and removing most of the charter advantages heretofore afforded to the GSEs."
He added that the "private conduits — and not the federal government — would assume the credit risk on the underlying mortgages. The federal guarantee would only come into play in the event that the conduit failed, putting the conduits' equity holders and creditors first in line for any losses."
The so-called mortgage credit guarantor entities would hold only a minimal mortgage portfolio, unlike Fannie and Freddie, which ultimately collected portfolios worth well over $1 trillion.
In the MBA's letter, John Courson, the group's president and chief executive, and Michael Berman, its chairman-elect, wrote that the number of conduits could start small but expand as the market grows.
"Initially, we would expect the number of MCGEs to be two or three," they wrote. "The regulator would have the ability to increase that number, through the granting of charters, as the market develops. Intense competition along a number of dimensions would benefit borrowers and the market as a whole. The market would also benefit from standardization of the MBS structure, so that investors can easily compare security offerings across MCGEs."
But other large banks pushed alternatives. Bank of America wrote that lawmakers should seek to get well away from the old system of Fannie and Freddie. Greg Baer, B of A's deputy general counsel, said the hybrid model, which implicitly backed the two GSEs, must be avoided.
"Any future role for the government will need to be transparent and clear — that is, institutions or products will either need to be explicitly guaranteed by the government or not guaranteed at all," Baer wrote. The GSEs, he wrote, should be limited to providing mortgage guarantees and should not be allowed to hold mortgages or MBS in the long term.
He also reiterated B of A's desire to foster a covered bond market under a fully nationalized model. Unlike securitization, in which a lender sells off its loans to be packaged into securities, covered bonds are issued by the bank to fund assets that remain on the balance sheet and require collateral to be refreshed with new loans if the original assets stop performing.
Baer said the model has proven effective elsewhere in the world but never developed here because of Fannie and Freddie.
"The covered bonds market has room to grow in the United States," he wrote, "although it must be tailored to meet the unique and lasting features of the U.S. mortgage market — including the 30-year fixed-rate mortgage and the GSEs themselves — and to serve the deeply embedded goal of broad and affordable homeownership that distinguishes U.S. housing policy."
Still, he noted that covered bonds are not a complete solution, but one tool available. It should also be considered "independently of any large-scale GSE reform initiatives."
The House Financial Services Committee is expected Wednesday to pass a bill that would create a national framework for covered bonds, and the Senate Banking Committee could hold a hearing on the issue next week.
The National Association of Realtors, a political heavyweight in the battle over the GSEs, embraced a more nationalistic view of the entities. Vicki Cox Golder, the group's president, argued that a government-chartered system is the best model for Fannie and Freddie's replacement.
"A government-chartered authority removes any ambiguity regarding the government's participation in the secondary mortgage market," Golder wrote.
Even so, they acknowledged that the secondary mortgage market should not consist primarily of the government. Doing so, Golder wrote, is "not sustainable or desirable."
Private capital has to return to the market and the government's activities have to return to previous levels, Golder wrote.
But many other commenters avoided embracing a specific course of action, instead emphasizing guidelines the administration should follow in developing its own plans.
For example, Jim Rodgers, vice president of commercial lending at My Bank/First United Bank and Trust in Oakland, Md., said taxpayers should not be put at risk.
"Any future housing finance system created should ensure that private capital be put at risk before federal government dollars," Rodgers wrote.
Part of the reason the Obama administration stalled in delivering a plan to overhaul the housing finance system last year as initially promised was fear of disrupting the market's recovery at a critical time.
Respondents, too, r ecognized the still critical state of the housing market and the need to remain flexible, cautioning against a one-size-fits-all solution.
"Not all parts of the system are functioning well yet and its recovery must not be jeopardized lest it further impact millions of current and future homeowners and renters and the investors of existing debt and asset-backed securities," wrote Cam Fine, president and CEO of the Independent Community Bankers of America.
Among the various proposals that have been aired, the ICBA endorsed a cooperative structure similar to a public utility as the best option for community banks.
The trade group also stressed the importance of government ties to the secondary market — regardless if charters for Fannie and Freddie are retained or a new market is established.
Doing so, they argued, would allow the GSEs to continue to keep money flowing during times of market distress, as well as continue to remain attractive to investors.
Some institutions, like the $3.4 billion-asset Superior Bank in Birmingham, Ala., stressed the necessity of liquidity in any new system. "The recovery of our current economy is being hampered by limitations on liquidity, and any actions that would further constrain the availability of credit by the banking industry will adversely affect overall economic health," wrote James White, executive vice president and chief financial officer at Superior.
But several community banks wrote in with other worries, namely that any housing finance overhaul would target the Federal Home Loan Bank System.
"Of most concern is that the ability of the Federal Home Loan banks to access the capital markets not be impaired," wrote John Klebba, president of the $245 million-asset Legends Bank in Linn, Mo. "This access has allowed funds from the capital markets of Wall Street to be provided efficiently to institutions on Main Street. I urge that any changes to the housing finance system not threaten these low cost of funds and the ability of the Federal Home Loan banks to fulfill their mission."
That sentiment was echoed by other small banks, including the $160 million-asset First Bethany Bank and Trust in Oklahoma, and the $71.7 million-asset First National Bank in Scott City, Kan., which stressed the critical role the Home Loan banks play in providing liquidity to community banks.
"In prioritizing federal housing finance objectives, a key policy goal should be to recognize and hold harmless institutions, such as the FHLBanks, that form a critical part of our housing finance infrastructure and that have performed their mission exceptionally well throughout the recent financial crisis," wrote William Small, chairman of First Federal Bank of the Midwest and director of the Federal Home Loan Bank of Cincinnati.
Mark Thompson, president and CEO of Boston Private Bank and Trust Co., agreed.
"The recent liquidity crisis illustrated the importance of the FHLBanks," Thompson wrote.