Transcript S.1217 Housing Finance Structure
S. 1217 Housing Finance Model
Comparing the Current Market Structure with Alternatives Available Under Corker-Warner
S. 1217: “The Housing Finance Reform and Taxpayer Protection Act”
Current GSE Housing Finance Structure
Homebuyers Private Mortgage Insurers
Loan level insurance acquired by lenders
Loan Level Insurance Bond Guarantors (Fannie and Freddie)
Fannie and Freddie take on the entire credit risk for roughly 2/3 of the remaining 1/3 rd rd of all loans made in the U.S. today. (much is taken on by FHA) All private credit risk takers are currently priced out of the market.
Bond Insurance
Very Little Capital
Despite the implied (and now explicit) government backstop, no reserve exists to protect taxpayers against loss if the economy faces another recession and loan delinquencies
Down payment Lenders/ Originators
Commercial banks, Credit unions, Mortgage brokers, Savings & Loan
Loans Issuers (Fannie and Freddie)
The GSE’s buy loans from originators, aggregate them, and create MBS each using their own systems.
Creates MBS Servicing Rights can be sold or retained by originator Fannie MBS (Separate TBAs)
Fannie insured loans delivered into Fannie Mae TBAs
MBS
Freddie MBS (Separate TBAs)
Freddie insured loans delivered into Freddie TBAs.
Challenge now is the wide spread between Fannie and Freddie TBA MBS
MBS
Servicers
rise again.
MBS Holders (Rates Investor)
Get a slightly different MBS depending on Fannie or Freddie
MBS Holders (Rates Investor)
Get a slightly different MBS depending on Fannie or Freddie
S.1217 Housing Finance Structure
Homebuyers Down payment Lenders/ Originators
Commercial banks, Credit unions, Mortgage brokers, Savings & Loan
Servicing Rights can be sold or retained by originator
Private Credit Risk Takers
Private Mortgage Insurers
Loan level insurance acquired by lenders
Bond Guarantors (Multiple)
Private Sector credit enhancers. Guarantee timely P&I on entire bond. May be monoline insurers, hedge funds, REITS, others. Legacy technology and data of GSEs may be sold to new guarantors, others to compete Loan Level Insurance Bond Insurance
Loans Private Issuers (Multiple)
Buy loans from originators, aggregates them, holds them up to 6 months. Issuers will include private Mutual for small lenders, and the FHLB System may create a mutual. Legacy technology of GSEs may be sold to create new issuers, others to compete
Creates MBS Capital Markets Hedging
Guarantors can hedge credit risk with instruments such as credit-linked notes, CDS, or other risk-transfer trades so long as FMIC approves of the hedge structures
Common Securitization (One Platform)
Overseen by FMIC. Central platform which delivers securities to TBA Market. Provides disclosures. Remits payments to investors. Creates one, single MBS and open to all participants to allow competition.
Servicers Mortgage Insurance Fund (MIF)
In FMIC, builds up through g’fees to 2.5% of outstanding guaranteed mortgage principle.
Federal Mortgage Insurance Corporation (FMIC)
Provides 100% full faith & credit guarantee. Approves servicers, PMIs, Issuers, Bond Guarantors. Oversees FHLBs.
Delivers MBS MBS Holders (Rates Investor)
Get a common, single MBS regardless of issuer
Catastrophic Backstop Insurance
1. FMIC replaces FHFA and approves private sector entities. Creates a Mutual Securitization Company for use by small originators. Oversees Federal Home Loan Banks. Oversees MIF as a catastrophic backstop fund. 2. Fannie and Freddie are replaced by private sector issuers and bond guarantors. Issuers buy mortgages from originators, aggregate loans and create standard mortgage-backed securities (MBS) which are then issued through the Common Securitization Platform (CSP) and sold to Rates Investors. Legacy technology and infrastructure of Fannie and Freddie sold to new participants to minimize/eliminate technology and operational disruption for originators.
3. Bond Guarantors guarantee timely P&I payment on securities and hold a capital base of 10% of outstanding risk. In a $5 trillion mortgage market, this means $500 billion in losses could be absorbed by the private sector before the Mortgage Insurance Fund is utilized by FMIC.
4. FMIC provides backstop guarantee of timely payment of MBS principal and interest to Rates Investors in the event Issuer fails to pay Investors, in return for a fee deposited in the Mortgage Insurance Fund administered by FMIC.
Homebuyers Down payment Lenders/ Originators
Commercial banks, Credit unions, Mortgage brokers, Savings & Loan
Servicing Rights can be sold or retained by originator
S.1217: Alternative Capital Markets Execution
Private Credit Risk Takers
Private Mortgage Insurers
Loan level insurance acquired by lenders
Credit Linked Note or Structured Arrangements
As an alternative to the use of bond guarantors to guarantee timely payment of P&I on FMIC-backed MBS, issuers could put together structured transactions as a means of credit enhancement. So long as the credit enhancement is at least 10% of the deal (for example a credit-linked note of 10 cents on the dollar or 10% subordination on a senior-sub CMO), the MBS can received a FMIC full faith and credit guarantee on the senior bond
Mortgage Insurance Fund (MIF)
In FMIC, builds up through g’fees to 2.5% of outstanding guaranteed mortgage principle. Loan Level Insurance
Loans
Capital Markets Credit Enhancement
Private Issuers (Multiple)
Buy loans from originators, aggregates them, holds them up to 6 months. Issuers will include private Mutual for small lenders, and the FHLB System may create a mutual. Legacy technology of GSEs may be sold to create new issuers, others to compete
Creates MBS Common Securitization Platform
Overseen by FMIC. Central platform which delivers securities to TBA Market. Provides disclosures. Remits payments to investors. Creates one, single MBS and open to all participants to allow competition.
Delivers MBS MBS Holders (Rates Investor)
Get a common MBS regardless of issuer
Federal Mortgage Insurance Corporation (FMIC)
Provides 100% full faith & credit guarantee. Approves servicers, PMIs, Issuers, Bond Guarantors. Oversees FHLBs.
Catastrophic Backstop Insurance Servicers