DeMarco Discusses The New Securitization System Set To Replace Fannie / Freddie


Edward J. DeMarco, Acting Director of
the Federal Housing Finance Agency (FHFA) sketched in a broad outline of the
agency’s vision for the future of the mortgage finance markets in the coming
years, a future that may or may not include Fannie Mae and Freddie Mac.  Speaking to the National Association of
Federal Credit Unions Congressional Caucus, DeMarco said his agency has
identified three goals for the next phase of its conservatorship of the two
government sponsored enterprises (GSEs):

a new infrastructure for the secondary mortgage market.

contract the GSEs’ dominant presence in the marketplace while simplifying and
shrinking their operations; and

foreclosure prevention activities and credit availability for both new and
refinanced mortgages.

DeMarco said that building toward a
future housing finance system requires building systems like a securitization
and standards for the secondary market that are accessible to small,
mid-size, and large markets alike.  A new
securitization platform for the secondary market is key to this vision. 

There may be confusion, he said, between
a platform and the establishment of a single GSE security.  Security performance has been a long standing
issue and establishment of the conservatorship has affected this issue in
various ways.  “Our immediate priority is
a single, common platform not a single security,” he said.

FHFA plans that this platform would be a
utility that would outlast the GSEs. 
DeMarco said he strongly believes in competitive markets and, as a
utility, the platform should enhance liquidity, standardization, and
transparency, all of which should foster that competition.   Whatever the structure of the secondary
market of the future, certain key functions will need to be performed and in
many cases, like developing data reporting standards, the standardization of
such functions will benefit the overall market.

In building a platform the agency is
committed to obtaining input from all market stakeholders. The GSEs are
participating in developing this infrastructure and identifying the issues that
would benefit from public input and DeMarco said he expects the actual building
the platform to be a multi-year effort and 
FHFA will release a white paper next month on a proposed platform
infrastructure to service as a basis for public comment.

DeMarco said that as FHFA and other
players prepare to transition to a new secondary post-conservatorship market he
anticipates that the GSEs will maintain their own distinct securitization
operations and continue to issue their own securities. 

DeMarco also restated announcements he had made earlier in the week about
the future path of guarantee fees and a new structure for representations and
warrantees. He told an audience of attendees at American Mortgage Conference on
Tuesday that guarantee fees, which have risen twice in the last year, will
continue on a path of gradual increases to bring GSE pricing closer to what it
would be were mortgage credit risk borne solely by private capital.  This, it is hoped, could begin to incentivize
private firms to increase their participation in the mortgage market.

In addition, a new framework for representations and warrantees will go into
effect on January 1 which will clarify lenders’ repurchase exposure and
liability for future deliveries and relieve lenders of certain repurchase obligations
for loans that meet specific payment requirements including exempting new loans
that have had on-time payment performance for 36 months and refinancing loans
with that record over 12 months.

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