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MBA, MCGE, and the Refinance Market

[Sep 2, 2009.]


Refinancing a home loan can be a traumatic experience. Like going to a check up at the doctor's office, bad news is a possibility. The Mortgage Bankers Association (MBA) thinks it has just the medicine for the mortgage finance market.

The medicine is to create a Mortgage Credit-Guarantor Entity--or, rather, many such entities--that would provide liquidity to the mortgage finance marketplace, meaning that home loans could be packaged into investments and sold to investors. This would, in theory, allow banks to make more home loans.

MGGEs and Freddie and Fannie

There are, of course, already some organizations that perform this function. They're called Freddie Mac and Fannie Mae...and no one much wants to invest in them, so the government bought them.

But now, the government owns a large percentage of U.S. home loans, through Freddie and Fannie. Long term, that's probably not a sustainable way to finance home purchases.

Enter MCGEs, to hopefully help carry some of the load.

What's Different About MCGEs

The Mortgage Bankers Association, as usual adept in getting its message out, has a nice MCGE FAQ available on its Web site. MCGEs are different than Freddie and Fannie because:

1. MCGEs would only buy easy to understand single and multifamily home loans. Not office buildings, not football stadiums, just homes that people live in.

2. MCGEs could only hold a "de minimus portfolio." MCGEs would have to remain small, that is.

3. The government would guarantee the securities purchased by MCGEs, but the MCGEs themselves would be private companies and run as such.

4. MCGEs would not be involved in affordable housing efforts by the Federal government (called, in recent years, "subprime lending," but a longstanding policy in America).

Refinancing of Jumbo Home Loans

As anyone who has tried to refinance a $600,000 mortgage knows, it's much harder to refinance a $600,000 mortgage than to refinance a $400,000. This is because Freddie and Fannie, generally speaking, only buy home loans of $417,000 or less.

Yes, the conforming loan limits in California may be $729,500, but banks don't count on that. Banks like to make home loans of $417,000 or less, because they can quickly flip the loans to Freddie and Fannie.

The arrival of MCGEs, with all the behaviors of a private company, might look at those jumbo home loans and see more profit and security there than is being recognized currently. If that were to prove true, it would be a welcome development for home owners in high cost states who want to refinance.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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