Mortgage Finance Act of 2011 Aims To Recreate Secondary Market



Mortgage finance actSenator Johnny Isakson, himself a former real estate broker from Atlanta, Georgia, has introduced The Mortgage Finance Act of 2011 with the goal of recreating the secondary mortgage market in a way that will integrate with the new Qualified Residential Mortgage provisions created under the Dodd-Frank legislation.

Here are a few of the major provisions as stated in The Purpose of this legislation:

The Mortgage Finance Act transitions and creates a new regulatory framework for high quality mortgage securitization (for Qualified Residential Mortgages – “QRM”) for both single family and multifamily mortgages, and accomplishes the following:

1. Resolves and eliminates Fannie Mae and Freddie Mac (through orderly receivership).

2. Fully pays back the American taxpayer for the cost of the Fannie Mae and Freddie Mac bail out.

3. Creates a new facility to guarantee securitizations of high quality QRM single family and multifamily mortgages.

4. Creates a catastrophic fund to protect against any future housing collapse.

5. Transitions the new facility to full privatization within 10 years from the date of
enactment.

Since the housing market melt-down, over two trillion dollars has been poured into various agencies and institutions to shore up the housing market. Hundreds of billions of these dollars have gone to Fannie and Freddie, to cover the steady stream of losses the two agencies have produced since 2008. Everyone knows that something must be done with Fannie and Freddie, but coming up with a viable plan is a challenge, to say the least.

The secondary mortgage market makes possible the U.S. housing and mortgage industry by engaging in business activities such as mortgage securitization, (mortgage backed securities) that allows for the investment of money from public and private sources as a way to provide funds to finance home mortgages as well as other types of real estate loans.

When the housing market collapsed, private investment in the U.S. mortgage market virtually dried up, and without government (i.e. taxpayer) intervention, there would have been no mortgages, and as a direct result, no housing industry. This of course would have been catastrophic for the U.S. economy. As it is, the lack of secondary market funding from private sources has left taxpayers to fund the secondary market, at a very high cost. This bill seeks to stop the bleeding and rebuild a new secondary market process that draws on the new rules for mortgage qualifying as defined by the Dodd-Frank legislation.

This bill is also endorsed by the National Association of Realtors. One major reason for the support is the fact that this bill also makes provision to keep the popular 5% down payment, as long as Private Mortgage Insurance is in place. This was a major sticking point for industry professionals, as Dodd-Frank rules called for a minimum 20% down payment. Virtually all segments of the housing industry agree that high quality home mortgages should be accessible to buyers who qualify based on credit and income, but might not have enough cash on hand to make a 20% down payment.

The secondary mortgage market is in need of an extreme makeover. Private investment capital is wary of mortgage backed securities at present. Only drastic action will restore investor confidence, and eliminate the problems that led to the housing market collapse. While this bill may find some who oppose it for special interest reasons, restoring faith in the secondary mortgage market is critical to the health of the U.S. economy.

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Comments

  1. Reform by itself will not restore investor confidence. What we need to help the secondary market come back is bonafide real estate appreciation. Once the bottom is established and we see just 1% appreciation year over year, that’s when the secondary market will pick up steam.

    • I agree with you Tom. Once the market can sustain any kind of stable price appreciation, investor confidence will improve. It’s all about where prices are going. When mortgage backed securities make sense as an investment, investors will come to the table.