Secondary Mortgage Market Reform Remains Key for Home Loan Refinances

[Mar 23, 2010.]

 

This week, the Chairman of the Mortgage Bankers Association Michael D. Berman testified before Congress about what to do with the flaming disasters known as Freddie Mac and Fannie Mae.

Meet Freddie and Fannie, They Help You Refinance

Freddie Mac and Fannie Mae, of course, are government-owned "companies" that buy mortgages that banks originate. Freddie Mac and Fannie Mae form what's known as the "secondary mortgage market," an extremely important factor in the overall mortgage market because when investors buy mortgages, banks can then go and originate more mortgages.

Without Freddie and Fannie buying up all these mortgages, mortgage interest rates could rise significantly and refinancing could become even tougher than it is now. Banks and other lenders would have no one else to off-load their debt to, meaning that far fewer mortgages would be originated in the first place.

Unfortunately, being an extremely important company does not necessarily mean that a company is extremely profitable. On the contrary, Freddie Mac and Fannie Mae are going broke as we speak--and Congress and other experts are frantically trying to decide what to do about that, for fear that mortgage rates will rise too high if Freddie Mac and Fannie Mae go the rest of the way into extinction.

MBA Chairman Has Three Big Ideas to Keep Refinancing Possible

The Mortgage Bankers Association has been at the forefront of attempting to formulate a plan to get the secondary mortgage markets functioning again so that homeowners can refinance at low rates into the future.

As Mr. Berman testified before Congress, he outlined three principles that he said should guide the process of revamping the secondary mortgage markets:

1. Private capital should fund the secondary markets

2. Government should, in certain cases, guarantee the mortgage-backed assets that investors buy (so that investors will be enticed to buy)

3. Taxpayers and the banking system should be protected with sensible mortgage regulation

The fact that Mr. Berman and others are bringing these ideas to the table is essential, because getting rid of Freddie and Fannie without putting any other system in their place could do irreperable damage to the mortgage markets.

Government Guarantees at the Security-Level, Not the Enterprise-Level

One particularly astute note from Mr. Berman's testimony, which can be read in full here, is that the government may want to guarantee mortgage-backed securities, but not mortgage-backed security companies.

That is to say, investors who buy mortgages (defined here as mortgages bundled together into a security or bond) should have some protection against losing money, but the companies that handle transactions relating to mortgage-backed securities should be allowed to lose money and go out of business if that's their capitalist fate.

In other words, the government could conceivably continue to subsidize mortgage lending without guaranteeing that any single mortgage-related company could hold the whole mortgage market hostage.

 

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.