Three trade associations — American Securitization Forum (ASF), Securities Industry and Financial Markets Association (SIFMA), and the CRE Finance Council — have all issued comment letters to the U.S. Treasury on GSE reform.
The common underlying thread in all the letters is the belief that government support is still essential to U.S. housing finance.
For instance, SIFMA said in its comments that absent the benefit of government support, mortgage credit would be more expensive and less available, making it difficult for consumers to obtain loans and own homes.
Additionally, the CRE Finance Council also reiterated that government support for multifamily properties was essential in moving forward, given the adverse affects at the macro and micro level of a withdrawal of government guarantees.
SIFMA’s letter also said that the secondary mortgage market will continue to function regardless of what policymakers decide, although “there is a price for everything,” the letter said.
In making future decisions, SIFMA urged policymakers to consider the following: secondary market liquidity for loans and MBS; product variety being offered; lender capacity to extend credit; sustainability of national lending markets; reappearance of regional pricing differentials; and cost and affordability of credit to consumers.
The letter also stressed the importance for policymakers in determining what they want from the mortgage markets before they can address what to do with the GSEs or the broader mortgage finance infastructure.
These findings are part of those made by SIFMA’s GSE reform task force, which was formed in 2009 after the U.S. Treasury requested comments on housing finance reform. The task force focused on several key areas such as the secondary mortgage markets.
The Case for the GSEs
Although the GSEs are not without fault, SIFMA said that they substantially benefitted the U.S. mortgage markets, arguing that solutions for their shortcomings should be developed without completely doing away with the benefits that these agencies provide.
Among the most important benefits from the GSEs cited by the association is the creation of a liquid TBA market, which allowed lenders to hedge risk, attracted capital, and reduced the cost of mortgage lending.
The ASF in its comment letter further elaborated on the role of the TBA market, adding: “The TBA market allows originators to hedge and fund their forward origination pipelines, since they can originate loans during the period between the trade and the settlement dates.”
ASF officials were skeptical about the prospect of the mortgage market thriving without the GSEs, adding that “it is probably not possible that the TBA market could be replicated outside of the GSEs, or outside of some replacement of the GSEs that, itself, was able to replicate the two underlying factors of fungible product and uniform credit risk across different originators.”
SIFMA stated in its letter that some form of explicit government guarantee on MBS will be required to maintain the liquidity of the TBA market. Purely private-sector solutions, the association said, cannot accomplish this objective.
It added that several options exist in terms of whether or not a GSE is needed and how many there should be. “There are policy choices to be made,” the letter stated, “and tradeoffs do exist.”
As policymakers come to these conclusions, the association stressed the importance of preserving simplicity and homogeneity of the GSE MBS markets to protect market liquidity.
SIFMA cited maintaining the GSE portfolios as a possible means for providing a mechanism to smooth out volatility of mortgage rates.
The ASF highlighted the challenges posed by some critics of the GSEs in terms of their profit-maximizing incentive coupled with their taxpayer-subsidized borrowing rates. The ASF stated that it was in no position to take a stance on the issue of GSE portfolios, but argued that the government should not limit its options, stating that the maintenance of portfolios is not necessarily linked with the private versus public debate.
The ASF pointed to a more general solution to the problem. “In the narrow area of real estate finance, the best solution is probably a structural one, to encourage both borrowers and lenders to focus relatively more on personal credit, and relatively less on real estate values, thus helping to re-order the housing finance system, at least as regards securitization, more strongly to a proper fixed-income market,” the ASF reported.
The ASF letter also commented on the disappearance of the non-agency market since the financial breakdown, noting that nearly 99% of all new home mortgages have come through the GSEs since the crisis struck.
“As the markets heal, private organizations should increasingly be encouraged to participate in the non-agency securitization markets,” the letter stated.
SIFMA also noted the particular problems related to resolving the conservatorships of the current GSEs. Its task force members said that the government must clearly express its intentions with respect to legacy GSE issues before and during any transition process. Policymakers should avoid bifurcation of markets into pre- and post-reform markets, SIFMA advised. “Abandoning an existing market would have serious and long-term consequences for the global flow of capital to the U.S.,” SIFMA’s letter stated.
“The mortgage finance industry impacts multiple aspects of the economy in the United States,” said Tim Ryan, SIFMA president and CEO. “While recognizing that there is no single right answer to GSE reform, it is critical that, in addressing this complex task, the benefits to consumers and the economy which are created under the current system be preserved. We encourage policymakers to fix what’s broken without dismantling the aspects that have provided efficient, cost effective lending and benefits to our economy for the last 30 years.”