Replace GSEs with Private Investors, Pass the Garrett Bill

At the end of October, Rep. Garrett has put forth bold legislation to end Fannie and Freddie and wean the U.S. housing industry off the taxpayer's wallet. As Congress reconvenes moving this legislation forward should be a high priority.

Garrett's bill, known as the Private Mortgage Market Investment Act, encompasses many pieces of existing Fannie and Freddie regulations that standardized residential mortgage origination and securitization for over 40 years. The main goal of this legislation is to replace these insolvent secondary market dinosaurs with a private market solution by encouraging investors to participate and increase liquidity.

Transparency will be greatly improved in ways that will attract private investors, for instance:

• The bill requires a five-day period, for investors to perform adequate due-diligence, from when a mortgage-backed security deal originates to the time it is sold. This provision will correct a major shortfall of the last decade: MBS were rushed out the door to market and there was too much reliance on the rating agencies for due-diligence.
• The performance of the each individual loan within a specific pool will be tracked with an individual marker. MBS pricing history will be disclosed and the securities will be exempt from the registration requirements of the 1933 Act.
• Disputes involving priority of claim will be clearly and specifically defined and upheld. Issues with representations and warranties will be resolved through arbitration, and investors of MBS will be able to appoint their own independent third party to act on their behalf.
• The FHFA will spearhead much of the development of the rules and regulations for this new market including the development of standardized legal documentation for the securitization agreements and credit standards for the different loan pools. 
• The bill changes provisions of Dodd-Frank in an effort to provide greater legal certainty to mortgage investors. Dodd-Frank requires ability-to-pay verification for mortgages, but with certain low-risk "qualified mortgages" (not to be confused with QRM) the ability to pay is assumed. The great unknown has been whether QMs would subject creditors, assignees and other investors of such securities to unknown legal liability. The Garrett Bill clarifies that investors will not be held accountable for the sins of the originators.
• It strikes the ambiguous risk retention rules of Section 941 of the Dodd-Frank Act which applies to every entity, but exempts the GSEs and Ginnie Mae having to keep skin in the game.
• It prohibits government-mandated modifications.

This is a great start. The legislation includes many measures which are needed post-housing market collapse. Best of all, the new legislation does not have any implied guarantee from the U.S. government. The outcome will be lower mortgage rates and increased loan options for consumers.

It should also go a step further and require one set of professional standards for every mortgage loan officer. The mortgage process begins with a mortgage loan originator and having loan originators exempt from licensing simply due to a bank charter does not add confidence in the finished loan product.

Rep. Garrett, after a decade of sounding the alarm about the financial iceberg facing Fannie and Freddie and being virtually ignored, now enjoys broad support across the political aisle. Even the GSE godfather Rep Barney Frank recognizes that they need to be replaced.  After decades of having his head in the sand he has finally seen the light or a lifeboat for his reputation.

Edward DeMarco, the acting director of the FHFA and conservator of Fannie and Freddie is also supportive of the private market approach. I often think that he must feel like the dean of students who is forced to cleanup the campus after a three-day keg party. He recognizes that with almost 5 trillion in mortgages and a current market share of over 90% they cannot continue to effectively operate and our housing market will not recover.

As a mortgage lender, I have witness first hand how the GSEs wandered off the ranch. By charter they were supposed to operate solely in the secondary market. Over the past two decades under the banner of expanding homeownership and aided by their accomplices in Congress, Fannie and Freddie lowered underwriting standards and purchased increasingly riskier loans.

During the last decade they even began to advertise directly to consumers to become homeowners. Their shareholders profited heavily and the executives enjoyed fat bonuses, thanks to the implied guarantee by the U.S. government.

In the oral interview for my Certified Mortgage Banker designation, GSE reform was front and center. I shared the opinion along with my panel made up of executives from the private sector, the FHLB and even the GSEs that they needed to be reigned in. This was in 2007. After their collapse, the hangover continues to haunt the housing market and those seeking new loans are now faced with higher interest rates caused in part by pricing overlays from the GSEs. Fannie and Freddie have so far cost the taxpayers over a 170 billion dollars with no end in sight.

As an American and a homeowner, I support this legislation because it will enable more mortgage choices and better rates as competition increases and it accomplishes this endeavor by awakening the sleeping giant in the private sector with a return to our capitalistic roots.

Richard Booth, is a Certified Mortgage Banker with America’s First Funding Group. LLC. a residential & commercial lender in Neptune, New Jersey.