Ed DeMarco
Senior Fellow in Residence, Center for Financial Markets
Finance and Housing Finance and U.S. Economy
Ed DeMarco is a senior fellow in residence at the Milken Institute Center for Financial Markets, where he researches issues involving housing finance, housing policy and financial institution regulation. He is a widely sought expert and frequent public speaker on housing finance.
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Michael Bright lores
Michael Bright
Director, Center for Financial Markets
Housing Finance and Regulation
Michael Bright is a director at the Milken Institute’s Center for Financial Markets (CFM), where he leads the housing program. In addition to housing finance, Bright works on issues related to international and domestic financial market regulation and policy.
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Eight Years is More Than Enough: A Proposal for a New Secondary Mortgage Market

By: Ed DeMarco Michael Bright
September 29, 2016

Eight years.

It has been eight years since the “temporary” conservatorships of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), began. Eight years since these two enterprises’ bondholders were rescued by a nearly $200 billion taxpayer injection because of their central role in the American housing market. Eight years since Congress, taking political risk to save the system, gave the Treasury Secretary the authority to inject unlimited taxpayer resources into these massive enterprises. Eight years since the Treasury Department, the White House, the new regulator—the Federal Housing Finance Agency, FHFA—and Congress began talking about the need for reform so taxpayers were never faced with the choice of bailing out companies or watching the economy crater.

But here we sit. After eight years.

It is time—long past time—for us to move beyond this situation. It is time for the mortgage market to grow up, to learn from the mistakes of the past, and to begin serving the needs of the 21st century American economy, like every other industry in this country. It is time for the end of the conservatorships—and taxpayer risk that it brings—of Fannie and Freddie.

There are a myriad of reasons why reform has taken so long. Principal among them is that policy-makers rightly fear the disruption that comprehensive reform, if done imprudently, could cause. After all, the importance of the secondary mortgage market that the GSEs controlled is directly correlated with why Congress authorized such a bailout in the first place.  

But just because a problem seems hard does not mean it needs to be intractable. We need not be paralyzed any longer.  Reform can be achieved. And with this core belief, we are setting ourselves towards the creation of a new, more dynamic, more responsible, and more mature mortgage market.

Today we are releasing the second in a series of papers on housing finance reform. In this paper, “Towards a New Secondary Mortgage Market,” we outline some changes that policy-makers can make to our mortgage system that will set our economy on a more sustainable path. It can usher in a modernized 21st century paradigm for homeownership that all helps secure the financial future for all Americans, homeowners and taxpayers alike.

One critical way to help make sure that reform is not unnecessarily disruptive—and a hallmark of the reforms we propose—is to use what works even as you replace what doesn’t. To us, this means keeping the market for interest rate investors and the market for credit investors clearly separate, but both operating on their own. Fortunately there is a way to do this—we can use Ginnie Mae as the mechanism for having the government backstop the system but also as the bridge to a more vibrant private market for mortgage credit risk standing in front of any taxpayer protection. It is a well-understood and globally accepted security. And so our proposal uses it as a bridge to a new secondary market.

Meanwhile, the GSEs themselves, once shed of their unique privileges as GSEs, can continue to provide key services that they have in the past, but with skin-in-the-game for the lending industry that uses them. A mortgage ecosystem where everyone involved has a stake in the performance of mortgage loans is a healthier system than the one of the past. It is a model we can embrace and use to usher in a new era of responsible lending choices.

Finally, we need the market for mortgage credit risk to grow and be vibrant and competitive. We propose to nurture this market without any leap of faith. We propose to rely on the infrastructure that already exists to serve the needs of the mortgage market as we “cross the river by feeling the stones” to the creation of a new asset class for mortgage credit risk.

We know where we need to go. It’s often felt more that the journey has frightened policy-makers than the destination. But that need not be the dynamic any longer.  By leveraging infrastructure that we know works, we can end the old duopoly of the past that forced the hand of Congress to put the money of taxpayers they represent at risk. We can bring in a new era of mortgage credit that asks everyone to have a stake in the long-term performance of the mortgages they originate, instead of allowing a game of financial hot potato that eventually ends in tears. We can modernize our mortgage market. Finally, after eight years, it’s time.


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