Printer Friendly

Secondary market players deserve plaudits.

In contrast to the recent upheavals in nature--Hurricane Andrew and Hurricane Iniki--the secondary mortgage market has been relatively calm from a structural or regulatory perspective. Certain actions by participants and regulators are noteworthy, however, and could have significant long-term implications.

GNMA--The Government National Mortgage Association (GNMA) deserves kudos. GNMA took administrative action that was highly responsive to a segment of the GNMA issuer community, those with more than 5 percent of their GNMA portfolios in the Florida and Louisiana areas hit hard by Hurricane Andrew. GNMA acted to assist those issuers facing massive delinquencies or shortfalls in collections from hurricane victims by agreeing to make pool advances on their behalf for up to three months, if the issuers were unable to fund the necessary pool advances through other means. Although issuers taking advantage of GNMA's assistance have had to enter into supervisory agreements, GNMA will forebear from extinguishing the issuers' servicing rights, provided no other act of default occurs. GNMA will allow the issuer to cure the default by repaying GNMA for any advance with interest within 90 days of the advance. This prompt response to an unprecedented emergency with flexible implementation of program requirements illustrates government at its best.

Unfortunately, GNMA has not demonstrated a similar degree of flexibility with regard to the adoption of a meaningful acknowledgement agreement, one in which GNMA would recognize a lender's security interest in GNMA servicing rights after an issuer's GNMA default. Fannie Mae and Freddie Mac already have such agreements in place. Some believe that positive GNMA action in this area would likely dispel any reluctance on the part of lenders to finance servicing acquisitions resulting from the Commonwealth Mortgage Company of Massachusetts' default in July, which had some adverse implications for a number of warehouse lenders.

PSA--The Public Securities Association (PSA) also should be commended for the restraint it exercised when it refrained in August from further decreasing the permitted variance for to-be-announced (TBA) pools. The variance guideline remains at 2.0 percent, down from 2.5 percent as a result of PSA action in March 1992. Wall Street sources have indicated that PSA probably will not address the issue for two years as the new chair of the PSA mortgage division is not expected to pursue the matter. However, the mortgage banking industry remains concerned about the 2.0 percent variance standard because it has resulted in a two-tiered market. Because the PSA guidelines are "voluntary," larger players have been able to negotiate 2.5 percent variance levels. However, smaller lenders, who need the greater variance more because of their typically smaller pools lack the leverage to obtain the favorable variance.

Financial Institution Regulatory Agencies--The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires the federal financial institution regulatory agencies (the agencies) to issue joint regulations on a number of issues within certain specific time limits. Final regulations must be published by August 1, 1993 and must be effective by December 1, 1993. Except perhaps for the congressional mandate to add an interest rate-risk component to their risk-based capital requirements with a phase out of the leverage ratio, the agencies do not appear overly enthusiastic about implementing FDICIA.

Although much attention was focused this summer on the agencies' joint proposal for uniform loan-to-value ratio requirements under section 304(a) of FDICIA, lesser attention has been paid to the potentially devastating requirements of section 132 for the development of safety and soundness standards. Standards are required for internal controls, information systems, internal audits, credit standards, loan documentation standards and interest rate risk among other matters.

The agencies have expressed concern about the cost of compliance with regulations that may be developed under section 132. In response to the agencies' joint advance notice of proposed rulemaking, in which the agencies asked for public comment on a number of questions to assist in the drafting of proposed regulations, MBA indicated that the issue was larger than the cost of compliance. At least in the context of real estate lending, we noted that the agencies must carefully weigh whether or not any standard will exacerbate the current credit crunch.

Notwithstanding the congressional mandate for new safety and soundness regulations under section 132 of FDICIA, MBA believes that regulatory reforms initiated directly as a result of FIRREA, or otherwise as a result of the thrift crisis, provide ample guidance to mortgage lenders as to prudent lending practices. Accordingly, MBA argued that the agencies can best implement section 132 of FDICIA by promulgating general performance standards or objectives rather than voluminous, specific requirements. Performance standards impose clear requirements while providing flexibility for their achievement. Specific standards could conflict with secondary mortgage market requirements, put financial institutions at a competitive disadvantage and exacerbate existing concerns about micro-management. Even if some discretion were allowed in the case of specific standards, the fear of being second-guessed by examiners could further discourage lenders from making all but "pure vanilla" loans. In connection with real estate lending, this result would surely have an adverse impact, in particular, upon loans for affordable housing and community development activities.

In addition to recommending the use of general performance standards, MBA also advised that credit underwriting and loan documentation standards are unnecessary for residential loans earmarked for sale into the secondary market or originated in accordance with secondary mortgage market standards. Specific loan documentation and credit underwriting requirements also were considered unnecessary for commercial real estate loans; it was advised that such loans should be originated under a "prudent investor" standard.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Secondary Market
Author:Slesinger, Phyllis K.
Publication:Mortgage Banking
Date:Oct 1, 1992
Previous Article:Servicing Portfolio Evaluation and Management - A Financial Perspective.
Next Article:Overcapacity revisited?

Related Articles
The Secondary Mortgage Market (computer-based training program).
Learning New Tricks.
Community deserves better from PeaceHealth.
Capital connection. (Portfolio).
A secondary under review.
Secondary market is less of a gamble with technology.
Industry players avoid the fate of King Lear.
Continuous offense: secondary fastbreaks Even-Front Alignments (Part IV).
Liquidity lockdown.

Terms of use | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters