In comments on the reform of the housing finance system, the Securities Industry and Financial Markets Association (SIFMA) expresses its support for some form of continued government support for the mortgage finance industry. Without the benefit of government support, SIFMA believes mortgage credit would be both less available and more expensive, making it more difficult for consumers to obtain loans and realize the goal of home ownership while dampening the economic benefits provided by a robust housing market.
“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.”
SIFMA shared its views in a comment letter to the U.S. Treasury, in response to a request for comments on reform of the housing finance system. The positions were developed by SIFMA’s GSE Reform Task Force, a group comprised of SIFMA members involved in all aspects of mortgage lending, from originators to investors and the market makers that create liquidity between them, which was formed in late 2009 to discuss and develop shared views on what are the most critical aspects of GSE reform for secondary mortgage markets.
SIFMA’s key views expressed in the letter include:
• Secondary mortgage markets will continue to function regardless of what policymakers decide as ‘there is a price for everything’. The price, however, is not always desirable to everyone. The issues for policymakers to consider are: how liquid secondary markets for loans and MBS would be, the breadth of products that would be offered to consumers, the capacity of lenders to extend credit, whether national lending markets could be sustained or if regional pricing differentials would reappear, and, ultimately, the cost and affordability of credit to consumers.
• Accordingly, policymakers need to determine what they want from the mortgage markets before they can address what to do with the GSEs or the broader infrastructure of mortgage finance.
• The GSEs, for all of their faults, have conferred significant benefits on U.S. mortgage markets. It is indisputable that these faults must be rectified and a new structure for the markets designed that will eliminate, or at least substantially mitigate, the source of these faults. We caution that the urge to “slay the dragon” should not cause collateral damage that would eliminate or make impossible the beneficial impacts and legacy of the old system that developed around the GSEs. One of the most important, if not the most important, was fostering the development of a liquid forward market for mortgage backed securities, known as the “to be announced” market or TBA, which allowed lenders to hedge risk, attracted private capital, and reduced the cost of mortgage lending. SIFMA’s Task Force believes that this TBA market is the key to a successful, liquid, affordable, and national mortgage market, as well as ensuring a sufficient level of capital is available to banks to lend. The historically huge and liquid global market for GSE MBS is initiated by the TBA mechanism.
• Some form of an explicit government guarantee on MBS will be required to maintain the liquidity of the TBA MBS markets. Purely private sector solutions cannot accomplish this important goal.
• There are a number of permutations of a guarantee, but ultimately, a government insurance wrap of the MBS that stands behind any private sector insurance or other corporate guarantees, as a catastrophic backstop, may be the most efficient means to achieve this goal.
• In terms of whether or not a GSE is needed at all, how many are necessary, and other corporate structure issues, a number of options are available and could be implemented. There are policy choices to be made, and tradeoffs do exist. Regardless of what path is chosen, an eye must be kept toward preserving the simplicity and homogeneity of the GSE MBS markets in order to preserve the important liquidity provided by the TBA markets.
• Portfolios present a number of choices for policymakers. While they are necessary at some de minimis level for purely operational reasons (assuming GSEs or similar entities exist), moving beyond this operational level presents a number of challenges and choices for policymakers. If there is a goal to provide a mechanism to smooth out volatility of mortgage rates, portfolios are one way to accomplish this. Whether or not these roles are desirable on a risk vs. value basis and should be continued is a question for policymakers to decide.
• The resolution of the conservatorships of the current GSEs will clearly be a challenge. SIFMA task force members believe that the government must clearly state intentions with respect to legacy GSE issues prior to and during any transition. Bifurcation of markets into pre- and post-reform markets should be avoided. In this manner, supporting market and investor expectations through a continuity of the existing perception of a guarantee will engender future market stability and resulting investor participation. The alternative – essentially abandoning an existing market – would have serious and long term consequences for the global flow of capital to the United States.
The full letter is available on SIFMA’s website at http://www.sifma.org/legislative/pdf/SIFMA-TREAS-20100720.pdf.
