Plans to Involve Private Investors Lessen Role of Fannie and Freddie

The Federal Housing Finance Agency (FHFA) released a three-part goal Tuesday to phase out the dominant role of Fannie Mae and Freddie Mac and allow for more private investors into the mortgage industry.

The first part of the goal involves building a new infrastructure to allow the private sector to participate in the secondary market. The goal includes national standards for the mortgage securitization process that Congress and participants can use to develop the mortgage market, according to a letter from the FHFA explaining the strategic plan. The letter also states that the GSEs securitize $100 billion per month in new mortgages, and today, no private sector infrastructure exists that is capable of doing this.
The second goal would be to contract the GSEs’ operations to the private sector, gradually moving mortgage credit risk from the GSEs to private investors, according to the letter.
The last goal is to continue with programs and initiatives to prevent foreclosures and ensure mortgage credit is available.
In September of 2008, the GSEs were placed into a conservatorship by the U.S Treasury amidst the housing market crises to keep the two mortgage giants in operation. The conservatorship for the GSEs meant the government would oversee their operations temporarily.
Since that time, the GSEs have received more than $180 billion in taxpayer support, according to the letter.
“With the conservatorships operating for more than three years and no near-term resolution in sight, it is time to update and extend the goals and directions of the conservatorships,” said Edward J. DeMarco, acting director of the FHFA.
Since entering the conservatorship, the GSEs have bought or guaranteed about three out of every four mortgages originated in the U.S., according to the letter.
In order to shift mortgage credit risk from the GSEs to private investors, several plans are being considered or are already implemented, according to the letter.
One includes a gradual increase in guarantee fee pricing so that the price may become closer to the level expected if mortgage credit risk was based on private capital. In September 2011, the FHFA announced plans to continue towards gradual price increases based on risk and the cost of capital, and in December of that year, Congress required the FHFA to increase guarantee fees by at least an average of 10 basis points, according to the letter.
Currently, most GSE mortgage securities are fully guaranteed, but one idea proposes to establish loss-sharing arrangements and have private investors bear some or all of the credit risk.
Another plan under consideration is to expand mortgage insurance coverage on loans.