An excerpt from the latest housing commission report on how the government should participate in the mortgage industry:
While private capital must play a greater role in the housing finance system, continued government involvement is essential to ensuring that mortgages remain available and affordable to qualified homebuyers.
The commission recommends the establishment of a limited, catastrophic government guarantee to ensure timely payment of principal and interest on qualified mortgage-backed securities (MBS).
This guarantee should (1) be explicit and fully paid for through premium collections that exceed expected claims (with a safe reserve cushion); (2) be triggered only after private capital in the predominant loss position has been fully exhausted; and (3) apply only to the securities and not to the equity or debt of the entities that issue or insure them.
The commission proposes to replace the GSEs with an independent, wholly owned government corporation—the “Public Guarantor”—that would provide a limited catastrophic government guarantee for both the single-family and rental markets.
Unlike the GSEs, the Public Guarantor would not buy or sell mortgages or issue MBS. It would simply guarantee investors the timely payment of principal and interest on these securities.
The model endorsed by the commission is similar to Ginnie Mae, the government agency that wraps securities backed by federally insured or guaranteed loans.
Other than the Public Guarantor, all other actors in this new system—originators, issuers of securities, credit enhancers, and mortgage servicers—should be private-sector entities fully at risk for their own finances and not covered by either implicit or explicit government guarantees benefitting their investors or creditors.
In the new system, the limited catastrophic guarantee of the Public Guarantor would only be triggered after all private capital ahead of it has been exhausted.
The government would be in the fourth-loss position behind (1) borrowers and their home equity; (2) private credit enhancers; and (3) the corporate resources of the issuers and servicers.
Read the full report here: