The Mortgage Bankers Association (MBA) has released "Up-Front Risk Sharing: Ensuring Private Capital Delivers for Consumers," a concept paper suggesting the Federal Housing Finance Agency (FHFA) require Fannie Mae and Freddie Mac to offer risk sharing options to lenders at the “point of sale” rather than on the back end after loans have been delivered to the government-sponsored enterprises (GSEs).
“We must find ways to bring private capital back into the mortgage market in a way that benefits both taxpayers and consumers. By requiring the GSEs to offer programs such as up-front risk sharing between lenders and the GSEs, the FHFA would be taking a big step in the right direction,” said MBA President and CEO David Stevens. “Ultimately, this would put private capital, not taxpayers, in the first loss position and would allow lenders of all sizes to compete, driving down costs for borrowers.”
Specific components of the MBA risk share concept paper suggest that FHFA could require the GSEs to accept loans with deeper levels of credit enhancement in exchange for reductions in guarantee fees and other loan level charges. In addition, risk sharing should occur at the front-end and not just the back-end of the transaction. This new structure would bring benefits to consumers by increasing access to credit and encouraging competition amongst private lenders, credit enhancers and investors, driving down guarantee fees and other GSE charges that are customarily passed on to borrowers.
"MBA's risk sharing concept is one part of a series of actionable steps that FHFA can take to help draw private capital back into the mortgage market while policymakers and other stakeholders continue the debate over the future of Fannie Mae and Freddie Mac," added Debra W. Still, CMB, MBA's Chairman. "MBA also has convened a task force of industry participants who are working on what the industry thinks the end state on the future of the secondary mortgage markets should look like and the pathway forward. This risk share proposal aligns with the task force's thinking on the components of important first steps."
"Up-Front Risk Sharing: Ensuring Private Capital Delivers for Consumers" is the second piece of a five-part plan which recommends immediate steps FHFA can take to help bring private capital back into the mortgage market. MBA recently released another concept paper, "Key Steps on the Road to GSE Reform," suggesting FHFA direct the GSEs to modify the Freddie Mac PC to mirror the exact structure of the Fannie Mae MBS so that these securities would be considered fungible for TBA delivery. In the weeks ahead, MBA will release subsequent papers outlining further recommendations.