A June 19 report from Moody’s Analytics advocates for winding down government-sponsored enterprises Fannie Mae and Freddie Mac and moving their securitization activities into a new platform overseen by an agency similar to the Federal Deposit Insurance Corporation.
The report called for a hybrid system where mortgage-backed securities would be insured by private firms that would not have the backing of the federal government yet would be subject to government regulation in a fashion similar to banks and other depository institutions.
The proposal called for three types of firms — mortgage originators and servicers, issuers of MBS and MBS insurers. MBS would be insured privately with neither explicit nor implicit federal government backing yet would remain subject to federal regulation. MBS insurers would purchase catastrophic secondary insurance from the government, and, in exchange, the government would ensure investors are paid if an MBS goes insolvent, but the MBS insurers themselves would be allowed to fail.
Should the federal government adopt a hybrid system, it would ensure that it only backed high-quality loans and received a premium for doing so while also ensuring that private capital stands first in line to take losses, which would protect American taxpayers. However, such a system would result in higher mortgage interest rates, the report noted.
Today, nine out of 10 new mortgage loans still are backed by Fannie, Freddie and Ginnie Mae, leading the government to take on credit risk for the securities issued by the three entities.
The report maintained that this new system should be overseen by a new federal agency known as the Federal Mortgage Insurance Corporation, and that the current Federal Housing Finance Agency would fall under the aegis of that agency. The FMIC would determine which MBS are eligible for the government guarantee, set mortgage standards and ensure that appropriate private capital was at risk ahead of the government backstop.
This latest report did not offer Fannie and Freddie a role in the new housing system. Rather, their investment portfolios would be wound down, their securitization activities put into the new platform and their guarantee functions sold to private insurers. All remaining assets would be sold to offset taxpayer bailout costs.
The report indicated that a new hybrid system would keep mortgage products available to qualified borrowers in all market conditions while the government guarantee would allow homeowners to continue to have access to long-term, fixed-rate mortgage products.
The report concluded, “Decisions made about the future of the mortgage finance system will affect U.S. homeowners and the broader economy for decades. Success will depend on striking the appropriate balance between the benefits of the private market and the backstop of the federal government. Finding the right balance will result in a stronger housing market, a more stable financial system and a healthier economy.”
Read Moody’s full report.