Acting director of the Federal Housing Finance Agency Edward DeMarco, has recently called on Congress to make much needed changes pertaining to lending regulation within the mortgage industry.
In a letter to Congress, DeMarco proposed a plan that would not only build a completely new infrastructure for the secondary mortgage market from the ground up, but also called for the contraction of activities at Fannie Mae and Freddie Mac.
"No private sector infrastructure exists today that is capable of securitizing the $100 billion per month in new mortgages being originated," DeMarco said. "Simply shutting down the enterprises would drive up interest rates and limit mortgage availability."
Additionally, DeMarco noted that a lack of residential-backed securities within the secondary mortgage market is preventing the sector from openly trading mortgage bonds, that are both private and nonagency oriented. Without this, it could be difficult for the mortgage industry to stage a rebound, despite recent economic improvements.
"The absence of any meaningful secondary mortgage market mechanisms beyond the enterprises and Ginnie Mae is a dilemma for policymakers expecting to replace the GSEs," the letter said. "Without an alternative market infrastructure that investors could rely on, new mortgages would have been largely unavailable if the enterprises suddenly had been shut down."
Meanwhile, DeMarco said the new structure of the secondary mortgage market should be entirely transparent so mortgage servicers and bond investors can easily access information on borrowers and closely monitor their collateral performance. In addition, the letter claimed the current servicing standards within the secondary market are inadequate and need to evolve in order to keep up with an ever-changing mortgage industry.
The letter also stated that mortgage servicers need more attention from lawmakers. With more attention, and updated regulations, it could result in a surge of competition among private lenders so the industry, which is currently dominated by government-sponsored enterprises, could be put back in the hands of the private sector.
"Without further statutory direction, FHFA views the mandate to restore the enterprises to a sound and solvent condition as best accomplished not only through aggressive loss mitigation efforts, but also by reducing the risk exposure of the companies, through appropriate underwriting and pricing of mortgages," the letter continued. "Such actions are consistent with what would be expected of a private company operating without."