April, 2012

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FEATURE SECONDARY MARKET Secondary market watchers say in interviews with us that a heady general election—all- a-Twitter with nuclear Iran, ObamaCare, and other issues in the political periphery—will most likely slow reform to a crawl until the next year or 2014. "I think it's going to be hard to get meaningful reform for a long time," says Laurie Goodman, senior managing director for Amherst Securities. "There's 04 The Hensarling Bill R ep. Jeb Hensarling's (R-Texas) GSE Bailout Elimination and Taxpayer Protection Act arrived in the House as early as 2008. H.R. 3310 underwent several modifications, particularly in the form of proposed amendments to Dodd-Frank, but the gist of the bill remains the same. THE BIG PICTURE: Back-pedal on the legislation that led to the creation of the GSEs. And start the stopwatch. WHAT IT PROPOSES: Devolution of Fannie and Freddie on a two-year timetable, with charters for each set to expire in three years, along with an end to affordable housing initiatives under either GSE and reduced limits for conforming loans. Also: Increases for "g-fees." WHAT IT REMOVES: The Affordable Housing Trust Fund under Fannie and Freddie, market share for both (over two years), their federal conservatorship (in three), and the risk-retention rule under Dodd- Frank. WHAT IT KEEPS: The FHFA, with the authority to wind down the GSEs, and payments at 5 percent for homeowners. A PHRASE IT WOULD EMBODY: It's never too late to make amends. clearly no legislation this year, and you can't legislate until after an election year at the earliest." David John, a senior research fellow with the conservative-lean- ing Heritage Foundation, agrees but adds that longtime benefi- ciaries of the Fannie-and-Freddie regime will likely play their part in watering down reform. "There are those of us who very clearly want to get rid of Fannie Mae and Freddie Mac," he says. 05 The NAHB Plan A s if in response to the FHFA plan, the NAHB unveiled its own 18-page white paper in March, urging policymakers to preserve basic Fannie-and-Freddie functions with a swap that replaces the companies with a patchwork of shared responsibility at the state and federal level. THE BIG PICTURE: Reinvent the wheel but make sure it runs like before. WHAT IT PROPOSES: Gradual phase-outs for Fannie and Freddie, transfers of respon- sibility to existing state and federal hous- ing agencies, reintroduction of private-label mortgage-backed securities, appraisal reform, sound regulatory and servicing oversight, and the creation of a private fund similar to the FDIC's Deposit Insurance Fund that back- stops securities. WHAT IT REMOVES: Fannie and Freddie (gradually), conflicts of interest between in- vestors and issuers, and "unsound mortgage products." WHAT IT KEEPS: A federal guarantee for the 30-year fixed-rate mortgage; all hous- ing finance agencies and departments at the federal level, including the 12 Federal Home Loan Banks; and existing foreclosure relief programs, albeit with reform. A PHRASE IT WOULD EMBODY: Don't throw the baby out with the bath water. "There are others—like homebuild- ers and Realtors—for whom that would be an utter disaster." Point in fact, just after the FHFA released its proposal, the chairman of the National Association of Home Builders (NAHB) submitted a response that reiterated the need for "a strong federal backstop for both single-family and multifamily mortgage markets," cautioning against "any abrupt move toward 06 The Treasury Plan T he Obama administration unveiled a tiered proposal to wind down Fannie and Freddie last year, giving Congress three choices that remain in disuse. THE BIG PICTURE: Choose one of the follow- ing answers to reform the secondary mortgage market. "None of the Above" isn't an option. WHAT IT PROPOSES: One of three options, with a five-to-seven-year time frame to wind down Fannie and Freddie: A. Complete privatization for the housing market, except for the FHA, Agriculture Department, and Department of Veterans Affairs. B. Same as above, but with higher g-fees on fixed-rate mortgages during a financial crisis to shore up credit and liquidity for homeowners. C. Special funds separate from more traditional sources of liquidity, specially designed to bolster the housing market in a catastrophic crisis, with reinsurance options available for mortgage-backed securities. WHAT IT REMOVES: Federal conservatorship for Fannie and Freddie (gradually), draw- downs in the GSEs' investment portfolios by 10 percent each year, and a return by the FHA to a smaller share of the market. WHAT IT KEEPS: Traditional roles for the abovementioned federal agencies, 10 percent down payments for homeowners (in line with the risk-retention rule), and still-conser- vative underwriting standards. A PHRASE IT WOULD EMBODY: Everything that comes in threes is perfect. THE M REPORT | 77 privatization" of the latter. Perhaps tellingly, the National Association of Realtors passed on releasing a similar statement. Despite strong responses, the FHFA isn't the only one with a plan on the books. We've compiled six of the more influential proposals currently out there—from lawmak- ers, officials, and trade groups—re- vealing about as much consensus regarding the way forward as the way the crisis unfolded. ORIGINATION SERVICING ANALYTICS SECONDARY MARKET

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