Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, has unveiled a proposal to reform the secondary mortgage market to ensure robust private investment in the U.S. mortgage market without a government guarantee.
“Since taking control of the House in January, we have remained steadfast in our drive and determination to end the ongoing bailout of Fannie Mae and Freddie Mac, protect taxpayers from future bailouts, and encourage private capital to re-enter the secondary mortgage market,” said Rep. Garrett. “Now that we have taken the important step of introducing a series of bills to wind down the government-backed mortgage twins, it’s time to start thinking about the ways we can jumpstart the private market to step in once they’re gone. My proposal to reform the secondary mortgage market will facilitate continued standardization and uniformity, ensure rule of law and legal certainty, and provide investors with the standardization and transparency necessary to ensure that a deep and liquid market develops in the absence of Fannie and Freddie.”
Garrett’s proposal to reform the secondary mortgage market will do the following:
Facilitate continued standardization and uniformity of mortgage securitization
►Direct the Federal Housing Finance Administration (FHFA) to create several categories of mortgages with uniform underwriting standards for each.
►Direct the FHFA to develop standard and uniform securitization agreements and representations and warranties.
►Streamline the process for securities that meet the standard underwriting characteristics and securitization agreements to be sold to investors.
►Provide FHFA authority to ensure underwriting and securitization standardization compliance.
►Abolish risk-retention provisions included in Dodd-Frank.
Ensure rule of law and legal certainty
►Remove conflicts of interest between servicers and investors.
►Clarify the rules around the eligibility of obtaining second lien mortgages.
►Require mandatory arbitration on disagreements between investors and issuers on reps and warrants.
►Prevent regulators from unilaterally forcing investors to reduce the principal of loans they have invested in.
►Allow for the appointment of an independent third party to act for the benefit of investors in mortgage-backed securities.
►Standardize servicer accounting and reporting for restructuring, modification or work-out of loans used as collateral.
Provide additional transparency and disclosure
►Increase the quality of the loan level information and the disclosures that investors can use to evaluate the value of the mortgages.
►Ensure investors have sufficient time to review and analyze disclosed information before making investment decisions.
►Increase pricing transparency by disclosing pricing history on securitization deals.
►Require the creation of an individualized marker for each loan within a securitization.
Throughout the 112th Congress, Garrett and his Republican colleagues on the Financial Services Committee have taken an incremental approach to gradually chip away at the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In March, House Financial Services Committee Republicans unveiled eight bills during the first round of legislation and then followed it up with a second round of seven bills in May. To date, 14 of the 15 bills have been cleared through the Capital Markets and Government-Sponsored Enterprises Subcommittee and are scheduled to be considered by the full Financial Services Committee in the next few months.