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MBA Proposes ‘Up-Front Risk Sharing’ Concept for Mortgage Market

The ""Mortgage Bankers Association"":http://www.mbaa.org/default.htm (MBA) shared a proposal to private capital back into the mortgage market while decreasing costs for taxpayers and borrowers.

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In a recent ""paper"":http://www.mortgagebankers.org/files/Advocacy/2013RiskSharingConceptPaper.pdf, the MBA explained the up-front risking sharing concept, which calls for the GSEs to offer risk-sharing at the front end of transactions.

""[The Federal Housing Finance Agency] should require the GSEs to offer risk sharing options to lenders at the 'point of sale,' rather than at the back end with loans that are already on the GSEs' balance sheets,"" the paper stated.

If transactions occur before the loans are sold, the MBA explained lenders would then be ""derisking"" the mortgages before they are brought to the GSEs, and mortgage insurers would be competing for business with more than just the two entities.

The proposal also suggested Fannie Mae and Freddie Mac should accept loans with ""deeper levels of credit enhancement,"" such as through mortgage insurance,

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lender recourse, or capital market investors, in exchange for reduced guarantee fees and other loan level charges.

""[B]y requiring the GSEs to shift credit risk to private capital, and by providing an equitable tradeoff in terms of lower guarantee fees and LLPAs, some lenders may be willing to lend to more borrowers, increasing access to credit,"" the paper stated.

Borrowers will also benefit through increased competition, and taxpayers' exposure to mortgage credit risk will also be reduced, according to the MBA.

""Ultimately, this would put private capital, not taxpayers, in the first loss position and would allow lenders of all sizes to compete, driving down costs for borrowers,"" explained David Stevens, MBA president and CEO.

The concept paper is the second part of a five-part plan on steps FHFA can take to bring private capital back into the mortgage market.

The first concept paper, _Key Steps on the Road to GSE Reform_, can be found on the MBA's ""website"":http://www.mbaa.org/files/Advocacy/2013SingleSecurityConcept.pdf.

""MBA's risk sharing concept is one part of a series of actionable steps that FHFA can take to help draw private capital back into the mortgage market while policymakers and other stakeholders continue the debate over the future of Fannie Mae and Freddie Mac,"" said Debra W. Still, CMB, MBA's Chairman. ""MBA also has convened a task force of industry participants who are working on what the industry thinks the end state on the future of the secondary mortgage markets should look like and the pathway forward. This risk share proposal aligns with the task force's thinking on the components of important first steps.""

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