THE RECOMMENDATION

Fannie Mae and Freddie Mac should be converted into government-chartered, non-profi t secondary mortgage market authorities. The authorities should ensure that the fl ow of capital continues to enter the mortgage market regardless of the state of the housing or mortgage markets or overall economy.

The non-profi t authorities should take the best components from the current GSEs, and import improvements from other secondary market models. The current GSEs, Fannie Mae and Freddie Mac, are best positioned to become non-profi t government authorities because of their existing infrastructure. The transition from the existing GSEs to government non-profi t authorities will be as smooth and seamless as possible, ensuring a continual fl ow of capital to the secondary market, which will be critical during any period of transition.

Unlike a federal agency, the new government non-profi t authorities will function as self-sustaining organizations, without needing annual appropriations from Congress and without a profi t motive. NAR believes that any organization with a private profi t and public loss structure, as the GSEs are presently structured, is inherently fl awed.

THE ISSUE:Restructure Fannie Mae and Freddie Mac (Government-Sponsored Enterprises) in a manner that ensures the continual fl ow of capital into the housing and mortgage markets in all economic conditions, and removes the current private profi t and public loss structure.

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Recommendations For Restructuring the GSEs As Secondary Mortgage Market Authorities

NATIONAL ASSOCIATION OF REALTORS®

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ELEMENTS AND FUTURE STRUCTURE OF THE PROPOSED GOVERNMENT AUTHORITIES

The government must clearly, and explicitly, guarantee the business of this entity. Taxpayer risk should be mitigated through the use of mortgage insurance on loan products with a loan to value ratio of 80 percent or higher and MBS guarantee fees. Only if these two insurance pools prove to be insuffi cient in some future economic crisis would the federal taxpayer be called upon to make good on the MBSs.

The new entity’s mission must ensure a strong, robust fi nancing environment for homeownership and multifamily housing.

There must be strong oversight of the authorities (e.g., by the Federal Housing Finance Agency FHFA), that includes the providing of timely reports to allow for continual evaluation of its performance.

The governance structure should provide for a Chief Executive Offi cer to oversee daily operations, a Board of Directors with practical expertise to ensure eff ective and effi cient operation, and an advisory board comprised of industry participants and consumer representatives to provide the organization, and its management, with real-time, front-line information regarding the authorities’ eff ectiveness and advice on their operation.

Political independence of the authorities is mandatory for successful operation (e.g., the CEOs will have fi xed terms so they cannot be fi red without cause, and the authorities will be self funded — no ongoing appropriations).

Sound and sensible underwriting standards must be established for loans purchased and securitized in MBSs, loans purchased for portfolio, and MBS purchases.

The authorities will reinvest all excess revenue to accumulate capital in strong markets to pursue a countercyclical policy in weaker markets, and to support the secondary market, provide for innovation, remain mission focused, and maintain their capacity.

The organizations must set standards for their MBSs that establish transparency and verifi ability for loans within the MBSs that are purchased or securitized by the non-profi t government authorities.

The primary purpose of the authorities’ portfolios will be to support their operations. The portfolios should only be large enough to support their business needs and when necessary because of insuffi cient private investment, and only to the extent needed, ensure a stable supply of capital consistent with market conditions.

The authorities’ mission will focus on ensuring housing aff ordability for the under-served segment of the population, which includes ensuring housing aff ordability in multifamily rental housing.

The authorities should price loan products based on risk. Housing aff ordability goals will assure that the authorities serve a full range of borrowers.

In order to increase the use of covered bonds, particularly in the commercial real estate arena, the organizations should pilot their use in multifamily housing lending and explore their use as an additional way to provide more mortgage capital for residential housing. Also, an FDIC guarantee should be considered to enhance the covered bond option to entice private market participation.

The authorities will be permanent (not expire).

Two authorities are required to provide for competition in the secondary market and avoid the risk a single entity would lose incentive to innovate and to be effi cient.

Reform of the credit rating agent is required, to address the inherent confl ict of interest in the current system.

The authorities should only purchase and guarantee transparent and verifi able mortgage loans, and should only purchase derivatives as a last option in order to manage risk.

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