The Chairman of the House committee that has been most active in the proposed dismantling of Freddie Mac and Fannie Mae has released his proposal to reform the secondary mortgage market. Rep. Scott Garrett (R-NJ) who heads the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises said his proposal intends to ensure robust private investment in the market without a government guarantee. His proposal would also abolish the risk-retention or so-called "skin-in-the-game" provisions of the Dodd-Frank Financial Reform Act.
According to a press release from Garrett's office, under his plan the Federal Housing Finance Administration (FHFA) will be directed to develop several categories of mortgages and develop uniform underwriting standards for each as well as standards and uniform securitization agreements, representations, and warrantees. The process for selling to investors will be streamlined for securities that meet the new standards and FHFA will be given authority to ensure underwriting and securitization standardization compliance.
Garrett said that his proposal would also ensure "rule of law and legal certainty" by removing conflicts of interest between servicers and investors, clarifying the rules around the eligibility of obtaining second lien mortgages and requiring mandatory arbitration of disagreements between investors and issuers regarding reps and warrants.
Under the proposal regulators would be prevented from unilaterally forcing investors to reduce the principal of loans in which they have invested and would allow for the appointment of an independent third party to act on behalf of investors in mortgage-backed securities (MBS).
To address issues of transparency and disclosure the quality of loan level information and disclosures to investors would be increased and investors would be guaranteed sufficient time to review and analyze disclosed information before making investment decisions. Lenders would have to disclose pricing history on securitization deals and an individualized marker would be created for each loan within a loan package. Servicers would also be required to use standardized accounting and reposting for any loan workouts
"Since taking control of the House in January, we have remained steadfast in our drive and determination to end the ongoing bailout of Fannie Mae and Freddie Mac, protect taxpayers from future bailouts, and encourage private capital to re-enter the secondary mortgage market," Garrett said. "Now that we have taken the important step of introducing a series of bills to wind down the government-backed mortgage twins, it's time to start thinking about the ways we can jumpstart the private market to step in once they're gone."
According to Reuters, Garrett and other Republican members of the House have already introduced 15 separate bills in an effort "to chip away at the role Fannie and Freddie play in the secondary mortgage market.
Video: Secondary Mortgage Market Reform
[View:http://www.cnbc.com//id/15840232?video=3000053588&play=1]
