The Mortgage Bankers Association (MBA) proposed a new line of MBS that would be structured with a federally-guaranteed wrap, which would be backed by loan-level guarantees from privately-owned, government-chartered and regulated mortgage credit-guarantor entities.

Michael D. Berman, chairman-elect of the MBA made the proposal yesterday as he testified before the House Financial Services Committee at a hearing titled Housing Finance: What Should the New System Be Able to Do?

Berman also proposed that the government should provide an explicit credit guarantee on a class of MBS-backed by ‘core’ single-family and multifamily mortgage products. He said the guarantee should be financed with risk-based fees.

Third, taxpayers and the system should be protected through limits on the mortgage products covered, on activities, and on portfolio size and purpose. Protections should also come in the form of  strong risk-based capital requirements as well as risk-based payments into a federal insurance fund.

Berman said that the centerpiece of MBA’s plan, however, is the new line of MBS. He said that the government guarantee would be similar to the one provided by Ginnie Mae — guaranteeing timely payments of interest and principal to bondholders and explicitly carrying the full faith and credit of the U.S. government.

This government wrap would help provide affordable financing rates. These guarantees would be supported by a federal insurance fund, capitalized by risk-based fees charged on the supported securities, which also could be a vehicle for an affordable housing fund.

“In supporting these loan-level guarantees, the private entities would rely on their own capital as well as risk retention from originators, issuers and other secondary market entities such as mortgage insurers," Berman said. "MBS investors would not face credit risk, but would take on the interest rate risk from the underlying mortgages.” 

He also noted that it would only be the MBS that would be guaranteed by the government, not the companies backing these securities. The debt and equity issued by the entities would be purely private. As with other firms, investors would accept the potential risk of failure and loss.

“For this reason, we recommend that regulators charter enough entities to establish a truly competitive secondary market and to overcome issues associated with ‘too big to fail,”  Berman said. “At least initially, the number of entities should be two or three and that number could increase as the market develops.”

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