S. 1217 Housing Finance Model
Comparing the Current Market Structure
with Alternatives Available
Under Corker-Warner
S. 1217: “The Housing Finance Reform and
Taxpayer Protection Act”
Current GSE Housing Finance Structure
Private
Mortgage
Insurers
Homebuyers
Loan level insurance
acquired by lenders
Loan Level Insurance
Down payment
Very Little Capital
Fannie and Freddie take on the entire
credit risk for roughly 2/3rd of all
loans made in the U.S. today. (much
of the remaining 1/3rd is taken on by
FHA) All private credit risk takers are
currently priced out of the market.
Despite the implied (and now explicit)
government backstop, no reserve exists to
protect taxpayers against loss if the economy
faces another recession and loan delinquencies
rise again.
Bond Insurance
Fannie MBS
(Separate TBAs)
Lenders/
Originators
Commercial banks,
Credit unions,
Mortgage brokers,
Savings & Loan
Bond Guarantors
(Fannie and Freddie)
Issuers
(Fannie and Freddie)
Loans
Fannie insured loans delivered into
Fannie Mae TBAs
The GSE’s buy loans from
originators, aggregate them,
and create MBS each using their
own systems.
Creates
MBS
Servicing Rights
can be sold or
retained by
originator
Freddie MBS
(Separate TBAs)
Freddie insured loans delivered into
Freddie TBAs.
Challenge now is the wide spread
between Fannie and Freddie TBA MBS
Servicers
MBS Holders
(Rates Investor)
MBS
Get a slightly different
MBS depending on Fannie
or Freddie
MBS
MBS Holders
(Rates Investor)
Get a slightly different
MBS depending on Fannie
or Freddie
S.1217 Housing Finance Structure
Private Credit Risk Takers
Private
Mortgage
Insurers
Loan level insurance
acquired by lenders
Homebuyers
Down payment
Loan Level Insurance
Lenders/
Originators
Commercial banks,
Credit unions,
Mortgage brokers,
Savings & Loan
Bond Guarantors
(Multiple)
Private Sector credit enhancers.
Guarantee timely P&I on entire
bond. May be monoline insurers,
hedge funds, REITS, others.
Legacy technology and data of
GSEs may be sold to new
guarantors, others to compete
Guarantors can hedge credit
risk with instruments such as
credit-linked notes, CDS, or
other risk-transfer trades so
long as FMIC approves of the
hedge structures
Bond Insurance
Common Securitization
(One Platform)
Private Issuers
(Multiple)
Loans
Capital Markets
Hedging
Buy loans from originators,
aggregates them, holds them up
to 6 months. Issuers will include
private Mutual for small lenders,
and the FHLB System may
create a mutual. Legacy
technology of GSEs may be sold
to create new issuers, others to
compete
Creates
MBS
Overseen by FMIC. Central platform
which delivers securities to TBA
Market. Provides disclosures. Remits
payments to investors. Creates one,
single MBS and open to all
participants to allow competition.
Delivers MBS
MBS Holders
(Rates Investor)
Mortgage Insurance
Fund (MIF)
In FMIC, builds up through
g’fees to 2.5% of outstanding
guaranteed mortgage
principle.
Federal Mortgage
Insurance Corporation
(FMIC)
Provides 100% full faith &
credit guarantee. Approves
servicers, PMIs, Issuers, Bond
Guarantors. Oversees FHLBs.
Catastrophic Backstop
Insurance
Get a common, single
MBS regardless of issuer
Servicing Rights
can be sold or
retained by
originator
1. FMIC replaces FHFA and approves private sector entities. Creates a Mutual Securitization Company
for use by small originators. Oversees Federal Home Loan Banks. Oversees MIF as a catastrophic
backstop fund.
Servicers
2. Fannie and Freddie are replaced by private sector issuers and bond guarantors. Issuers buy
mortgages from originators, aggregate loans and create standard mortgage-backed securities
(MBS) which are then issued through the Common Securitization Platform (CSP) and sold to Rates
Investors. Legacy technology and infrastructure of Fannie and Freddie sold to new participants to
minimize/eliminate technology and operational disruption for originators.
3. Bond Guarantors guarantee timely P&I payment on securities and hold a capital base of 10% of
outstanding risk. In a $5 trillion mortgage market, this means $500 billion in losses could be
absorbed by the private sector before the Mortgage Insurance Fund is utilized by FMIC.
4. FMIC provides backstop guarantee of timely payment of MBS principal and interest to Rates
Investors in the event Issuer fails to pay Investors, in return for a fee deposited in the Mortgage
Insurance Fund administered by FMIC.
S.1217: Alternative Capital Markets Execution
Private Credit Risk Takers
Private
Mortgage
Insurers
Loan level insurance
acquired by lenders
Homebuyers
Down payment
Credit Linked Note or
Structured Arrangements
As an alternative to the use of bond guarantors to guarantee
timely payment of P&I on FMIC-backed MBS, issuers could put
together structured transactions as a means of credit
enhancement. So long as the credit enhancement is at least 10%
of the deal (for example a credit-linked note of 10 cents on the
dollar or 10% subordination on a senior-sub CMO), the MBS can
received a FMIC full faith and credit guarantee on the senior bond
Loan Level Insurance
Lenders/
Originators
Commercial banks,
Credit unions,
Mortgage brokers,
Savings & Loan
Capital Markets Credit Enhancement
Common Securitization
Platform
Private Issuers
(Multiple)
Loans
Servicing Rights
can be sold or
retained by
originator
Buy loans from originators,
aggregates them, holds them up
to 6 months. Issuers will include
private Mutual for small lenders,
and the FHLB System may
create a mutual. Legacy
technology of GSEs may be sold
to create new issuers, others to
compete
Creates
MBS
Overseen by FMIC. Central platform
which delivers securities to TBA
Market. Provides disclosures. Remits
payments to investors. Creates one,
single MBS and open to all
participants to allow competition.
Delivers MBS
MBS Holders
(Rates Investor)
Get a common MBS
regardless of issuer
Servicers
Mortgage Insurance
Fund (MIF)
In FMIC, builds up through
g’fees to 2.5% of outstanding
guaranteed mortgage
principle.
Federal Mortgage
Insurance Corporation
(FMIC)
Provides 100% full faith &
credit guarantee. Approves
servicers, PMIs, Issuers, Bond
Guarantors. Oversees FHLBs.
Catastrophic Backstop
Insurance