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Secondary market.


This article addresses one of the most important issues to face the secondary market for mortgage loans in many years - regulation of government-sponsored enterprises (GSEs). Inappropriate regulation of the secondary market agencies could lead to higher guaranty fees, reduced mortgage purchases, unnecessarily tight underwriting, unduly restrictive lender eligibility standards and diminished product innovation.

It is useful to outline the critical GSE regulatory issues confronting the industry. A number of key questions emerge that deserve special and immediate attention. Should there be a single "super" GSE regulator? Should there be uniform regulations for all GSEs? Which governmental agency should perform oversight functions? Should program and safety and soundness oversight functions be divided between two separate entities? What capital standards are appropriate for the agencies - bank-like minimums or risk-based tests? If HUD remains the regulator, what needs to be done to make sure its oversight is meaningful and effective? Should Treasury, or some other body be the regulator? What kind of compliance and enforcement powers should the regulator possess? What is the appropriateness of maintaining specific credit ratings? Some preliminary thoughts on these issues are discussed.

Single super GSE regulator/Regulations - A single GSE regulator would be disastrous for Fannie Mae, Freddie Mac and the mortgage industry. The operational characteristics of the eight GSEs do not lend themselves to effective uniform regulation. A single regulator or uniform regulation is likely to be extremely bureaucratic thereby encumbering the business decision-making apparatus of the agencies. Furthermore, a single GSE regulator is likely to regulate to the highest possible across-the-board standard without giving special consideration to the types of risks undertaken and the individual public missions of each GSE. Moreover, all GSEs are not created equal. While the other GSEs produce goods with public benefits, none of them finance human needs as basic as shelter.

Who should regulate?/Division of regulatory responsibilities - MBA's clear preference is to have HUD remain the sole regulator of Fannie Mae and Freddie Mac. HUD is the logical choice for the following reasons: (1) HUD is the only cabinet level agency dedicated to housing and housing finance; (2) HUD has institutional knowledge of housing finance and Fannie Mae operations since HUD has engaged in Fannie Mae oversight for more than 20 years; (3) notwithstanding perceptions to the contrary, HUD has done a competent job in regulating Fannie Mae given its staffing constraints; and (4) HUD's new regulatory proposals should help it to be even more effective in the future. To ensure that HUD has adequate resources to support oversight activities, it may be appropriate to impose some kind of regulatory fee assessment on the secondary market agencies to pay for staffing, audits, examinations and regulatory analyses. Furthermore, it probably is not wise to separate "program" oversight from "safety and soundness" oversight. The former is inextricably linked to the latter and should be gauged in relation to the each other.

Still another option is to have Treasury or some other entity serve in a backup safety and soundness role. There may be some merit in exploring the idea of a special safety and soundness council comprised of government and private sector officials that comes into being when the agency finds itself in financial difficulty. This special council would be empowered to receive information, conduct analyses and make recommendations to Congress.

Enforcement powers - Current enforcement powers of HUD are broad. Typically, a "regulator with teeth" would have the power to cause an insolvent institution to be dissolved. We do not believe HUD, or any other executive branch agency, should have the power to dissolve the agency because executive branch politics should not be allowed to thwart the will of Congress. While HUD might be able to recommend dissolution, only Congress should have the authority to repeal the charters of these agencies.

Appropriate capital standards - In general, a capital framework that incorporates all relevant risk factors and public mission objectives is desirable. As facilities designed to be active in good and bad economic times, we believe across-the-board minimum capital standards would create "credit crunches" in mortgage lending similar to those currently being experienced by customers of the banking and thrift institutions. Therefore, an economic stress test-based capital standard should be favored over bank-like minimum capital standards.

Credit ratings/Ratings agencies - The adherence to any type of credit rating is unacceptable. It is questionable whether or not the rating agencies can produce a reasonably reliable rating.

In conclusion, there appears to be a general consensus that legislation and agency regulatory action in this area is quite imminent. We believe that most of the issues lend themselves to a range of options capable of accommodating each agency's different corporate strategies within a unifying regulatory theme.
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Author:Taliefero, Michael S.
Publication:Mortgage Banking
Article Type:column
Date:Feb 1, 1991
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