The Mortgage Bankers Association (MBA) today released a new paper outlining its proposed framework for a refined government role in the secondary mortgage market designed to ensure liquidity for mortgages without presenting unnecessary risks for the taxpayer. 

The centerpiece of MBA’s recommendation is the creation of a new line of MBS. 

Each security would have two components – a loan level guarantee provided by a privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE) and a security-level, federal government-guaranteed wrap. 

The wrap would be an explicit government guarantee focused on the credit risk of these mortgage securities, similar to that on a Ginnie Mae security.  Fannie Mae and Freddie Mac’s infrastructure, including their technology, human capital, standard documents and relationships, could be used as the foundation for one or more MCGEs.

“Our Council, featuring some of the best minds in our industry, has spent significant time looking at the secondary market – what worked and what didn’t -- and came up with these recommendations,” said John Courson, MBA’s President and CEO.  “While this is not the only viable framework, we believe the recommendations represent a workable approach, balancing the government’s ability to ensure liquidity, with the need to protect taxpayers from the credit and interest rate risk inherent in mortgage finance.”

The government guarantee is not intended to support the entire mortgage market, but only those products needed to keep the secondary market for core mortgage products liquid and functioning even during times of extreme market stress.  

Under the MBA’s proposal, the government securitization guarantee would support only “core” mortgage products with well-understood, well-documented risk characteristics.  New products would be proposed by the MCGEs, recommended by the government guarantor and would require approval from a regulator.

The paper, Recommendations for the Future Government Role in the Core Secondary Mortgage Market, is the result of work by MBA’s Council on Ensuring Mortgage Liquidity, a 23-member task force representing MBA’s diverse membership base.

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