This week, the National Association of Home Builders (NAHB) announced a new comprehensive framework for housing finance system reform that would transition Fannie Mae and Freddie Mac to a new mortgage securitization system 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 home builder from Gainesville, Fla.
To achieve this goal, Rutenberg said the system must include private, federal and state sources of housing capital; offer a reasonable menu of sound mortgage products for both single-family and multifamily housing that is governed by prudent underwriting standards and adequate oversight and regulation; and provide a federal backstop to ensure that 30-year, fixed-rate mortgages are available at reasonable interest rates and terms.
Replacing Fannie Mae and Freddie Mac with a new securitization system for conventional mortgages backed by private capital and a privately funded federal mortgage-backed securities fund must be done in an orderly fashion over time. During this phase-in period, Fannie Mae and Freddie Mac would remain operational until the alternative system is fully functioning.
Under this scenario, Fannie Mae and Freddie Mac would be gradually replaced by private housing finance entities (HFEs) that would be chartered to purchase single-family and multifamily mortgages from loan originators and package the loans into securities for sale to investors worldwide. The federal government would guarantee the securities, not the mortgages.
The HFEs would only purchase mortgages that are well understood and have reasonable risk characteristics, such as standard 30-year fixed-rate loans. The HFEs would operate under the oversight of a strong independent regulatory agency to ensure all aspects of safety and soundness. NAHB believes the 12 regional Federal Home Loan Banks could serve as HFEs.
Federal support to the conventional mortgage of the future would consist of a privately funded insurance fund where the government would guarantee its solvency in a manner similar to the Federal Deposit Insurance Corporation's backing of the fund that insures savings deposits. Under this system, mortgage originators would pay premiums to capitalize 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.
"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," said Rutenberg.
For more on the NAHB's plan, visit its website.