Michael D. Berman, CMB, chairman-elect of the Mortgage Bankers Association (MBA), testified before the House Financial Services Committee at a hearing titled, "Housing Finance: What Should the New System Be Able to Do?" Below is Berman's oral statement before the committee, as prepared for delivery:
"Thank you, Mr. Chairman for the opportunity to testify today. I have been in the real estate finance industry for over 25 years. I currently oversee all of my company's loan programs, including multifamily programs with Fannie Mae, Freddie Mac and FHA. My company also has been active in the commercial mortgage-backed securities arena as an investor, lender, issuer of securities, servicer and special servicer.
"Since the creation of Fannie Mae in the 1930s, the federal government has played a key role in providing stability to the secondary mortgage market. The current housing crisis has tested that role and led to calls for a fundamental rethinking of the part played by the government in the housing finance system.
"To spearhead this thinking, in October 2008 MBA formed the Council on Ensuring Mortgage Liquidity, which I chair. This 23-member council is made up of industry practitioners from the single-family, multifamily and commercial sectors of the real estate finance industry. Its mission has been to look beyond the current crisis, to what a functioning secondary mortgage market should look like.
"Let me identify three principles that lie at the heart of our discussions.
"First, secondary mortgage market transactions should be funded with private capital.
"Second, to promote uninterrupted market liquidity for the core mortgage market, the government should provide an explicit credit guarantee on a class of mortgage-backed securities backed by 'core' single-family and multifamily mortgage products. This guarantee shouldn't be free, but should be financed with risk-based fees.
"Third, taxpayers and the system should be protected through limits on the mortgage products covered, limits on activities, limits on portfolio size and purpose, strong risk-based capital requirements, and risk-based payments into a federal insurance fund.
"The centerpiece of MBA's plan is a new line of MBS. Each security would have two components: a security-level, federally-guaranteed 'wrap,' which would be backed by loan-level guarantees from privately-owned, government-chartered and regulated mortgage credit-guarantor entities.
"The government guarantee would be similar to the one provided by Ginnie Mae - guaranteeing timely payments of interest and principal to bondholders and explicitly carrying the full faith and credit of the U.S. government. This government wrap will help provide affordable financing rates. These guarantees would be supported by a federal insurance fund, capitalized by risk-based fees charged on the supported securities, which also could be a vehicle for an affordable housing fund.
"In supporting these loan-level guarantees, the private entities would rely on their own capital as well as risk retention from originators, issuers and other secondary market entities such as mortgage insurers. MBS investors would not face credit risk, but would take on the interest rate risk from the underlying mortgages.
"It's important to note that while MBS in this model would be guaranteed by the government, the companies backing these securities would not. The debt and equity issued by the entities would be purely private. As with other firms, investors would accept the potential risk of failure and loss.
"For this reason, we recommend that regulators charter enough entities to establish a truly competitive secondary market and to overcome issues associated with 'too big to fail.' At least initially, the number of entities should be two or three and that number could increase as the market develops.
"The framework we have proposed is not intended to be the entire market. It's meant to focus on a narrowly-defined set of core mortgage products that are essential to have available through all market conditions. Our proposal recognizes the need for a wider array of products through a reemergence of the private market, including private label securities and covered bonds.
"We must also ensure that the transition from the current system to a new model is as seamless as possible. Measures such as focusing the GSEs on a narrow range of mortgages and winding down their portfolios can be undertaken now. Additionally, the use of a good bank/bad bank strategy would help retain the best people, processes, and infrastructure from the GSEs. Identifying a clear path forward will remove uncertainty and ensure that the GSEs' resources are of service now and in the future.
"Mr. Chairman, MBA's recommendations combine an acknowledgement that only a government guarantee can attract the depth and breadth of capital necessary for the market, with a reliance on private capital, insistence on multiple layers of protections for taxpayers and a focus on ensuring a competitive, efficient secondary mortgage market.
"Our recommendations represent a clear and workable approach to ensuring liquidity in the mortgage market. These proposals were developed by industry practitioners who have been working on these issues for their entire careers. We understand the capital markets and have perspective on what will work.
"We welcome your thoughts and comments on our ideas."
For more information, visit www.mortgagebankers.org.
