Toward a New Secondary Mortgage Market
There is a simple and sensible way to finally achieve comprehensive housing finance reform in the U.S.. The approach proposed in this paper is to amend the charters of Ginnie Mae, Fannie Mae and Freddie Mac, and the Federal Housing Finance Agency.
Simply amending these charters can accomplish a wide swath of the objectives that have eluded legislators and policymakers since the conservatorship of Fannie Mae and Freddie Mac began in 2008. Each of the charter changes we propose can stand on its own right as sound policy. Collectively, they allow us to take important steps toward a more robust, dynamic, and secure market for mortgage credit risk.
All of this can be achieved while not materially affecting borrower interest rates, since we leverage a well-known and widely accepted government-backed security that the market already understands, as well as risk transfer mechanisms that the market has accepted since 2013. The transition to this reform can be accomplished smoothly, leaving a housing system that is efficient, open to competition and innovation, and ensures a stable supply of mortgage financing.
Our proposal would end the conservatorships, reconstitute Fannie Mae and Freddie Mac as lender-owned mutuals, and build on the credit risk transfer initiative to create a private market for mortgage credit risk while preserving a government-guaranteed rates market for mortgage-backed securities. Other firms could compete with Fannie and Freddie in the business of aggregating loans and gathering together the private capital that takes on housing risk ahead of the backstop government guarantee. We seek to make these changes while preserving as much as possible how lenders, servicers, and others operate today so as to keep what works, avoid disruption to current business practices, and limit risk in transition.