Homebuilders propose overhaul of housing finance system

Homebuilders deposited their two cents Friday on how to wind down the dominant role of Fannie Mae and Freddie Mac in the housing finance system. 

The National Association of Home Builders (NAHB) released a white paper on Friday that would transition Fannie and Freddie to a new mortgage-securitization system — backed by private capital and privately funded federal mortgage-backed securities — for single-family and multifamily conventional mortgages.

“Our plan seeks to overhaul the housing finance system to ensure that housing credit is available and affordable in the future and is delivered through a competitive, efficient, sound, safe and stable system,” said NAHB Chairman Barry Rutenberg, a homebuilder from Gainesville, Fla.

“The intent is for the government to be in a secondary position and to be the insurer of last resort in order to reduce the risk to taxpayers.”

Under the plan, the two mortgage giants would be gradually replaced by private housing finance entities that would purchase single-family and multifamily mortgages from loan originators and package them into securities to sell to investors.

Essentially, the federal government would guarantee the securities, not the mortgages.

Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), recently offered up the broad outlines of a proposal to Congress that would reduce the involvement of Fannie and Freddie by eliminating the direct funding of mortgages, creating a mortgage market that includes a more equitable combination of public- and private-sector financing, keeping up with foreclosure-prevention efforts and making credit available for refinancing and new loans. 

The plan aims to reduce Fannie’s and Freddie’s roles by increasing fees charged to borrowers, including guarantee fee pricing, which could increase costs and possibly make private loans more attractive to mortgage-seekers.

Under the homebuilders’ plan, during the phase-in period, Fannie and Freddie would continue in their current work until the other system is up and running. 

The homebuilders said changes are dependent on the involvement of private, federal and state sources of housing capital, the inclusion of risk-averse mortgage products and the creation of a federal backstop to ensure that 30-year, fixed-rate mortgages are available at reasonable interest rates and terms.

The entities would purchase mortgages that have reasonable risk characteristics, such as standard 30-year fixed-rate loans, while operating under the oversight of an independent regulatory agency to ensure all aspects of safety and soundness. 

The housing group suggested that the 12 regional Federal Home Loan Banks could serve as the housing entities.

Federal support would consist of a privately funded insurance fund, the solvency of which would be guaranteed by the government, similar to the way that the Federal Deposit Insurance Corporation insures bank accounts. 

As part of the plan, mortgage originators would pay premiums into the insurance fund, which would cover losses and ensure full payment to investors. 

The federal government would be required to pay investors only if the insurance fund was depleted.

NAHB’s housing finance reform blueprint also proposes: 

• Supporting the development of new mortgage-backed-securities ratings agencies that would use criteria developed by securities investors to assure objective evaluations and avoid conflicts of interest;

• Continuing the housing finance support roles of the Housing and Urban Development, Veterans Affairs and Agriculture departments, along with the Federal Housing Administration and the Government National Mortgage Association (Ginnie Mae);

• Enhancing the position of state and local housing finance agencies as a source of housing funds; 

• Expanding the role of the Federal Home Loan Banks in the housing finance system by enhancing their mortgage-purchase programs by allowing banks to move beyond portfolio purchases to securitization; and

• Undertaking a series of comprehensive reforms to ensure sound mortgage products and prudent underwriting to avoid the problems encountered during the housing boom and crash.