MBA White Paper Looks at Ways to Fix Secondary Mortgage Market
Document presents “a set of building blocks” including covered bonds
01/14/2009
The Mortgage Bankers Association has established a Council on Ensuring Mortgage Liquidity to help fix the broken mortgage market. The Council—comprised of 25 real estate finance industry leaders—hosted a summit in November 2008 “to discuss what fundamental elements are required for a functioning secondary market.” This excellent white paper grew out of that summit and the Council’s internal discussions.
Titled “Key Considerations for the Future of the Secondary Mortgage Market and the Government Sponsored Enterprises (GSEs),” the document has very specific goals:
“This white paper provides a framework for understanding the role of the secondary mortgage market and the GSEs and some of the key considerations for their futures. This paper is not a policy statement—it makes no attempt to weigh the merits of different [financing] systems or to recommend one or more approaches. Rather, this paper presents a set of building blocks from which policymakers, industry representatives, academics and others can begin to understand and discuss the merits of different options and recommendations.”
The document contains four main sections. Section One is a quick review of fundamental concepts and elements related to the secondary mortgage market. The second section discusses the major methods for investing in mortgages, ranging from purchase of whole loans to various permutations of MBS to “[s]ecured debt and covered bonds.” Section Three sets forth “key considerations” in assessing the best ways to restore the mortgage market—risk assessment, proper alignment of risks, transparency, and so forth.
The last section of the white paper presents a “menu” of models for a redesigned mortgage market. One menu item is traditional covered bonds. Another model is described as “hybrid” covered bonds. Under that model, banks could only issue covered bonds backed by the securities from a new government-related securitization entity of some type. “If something close to the current GSE model were adopted, covered bonds would essentially replace the portfolios of the GSEs.”
Written in plain language, this 40-page paper is an essential read for anyone with an interest in the future of U.S. mortgage markets.
To download a PDF of this white paper from the MBA website, click here.