Mortgage Bankers Push for New Federal Loan Guarantee Program

By Dawn Kopecki

Sept. 2 (Bloomberg) -- Mortgage bankers are pushing Congress to expand the U.S. government’s support of the market by guaranteeing private-industry home-loan securities and replacing finance companies Fannie Mae and Freddie Mac.

The first step builds off the model for Ginnie Mae, the agency that guarantees payments on bonds backed by government- insured mortgages, according to a report today by the Washington-based Mortgage Bankers Association. The second part involves winding down government-seized mortgage buyers Fannie Mae and Freddie Mac and creating “two or three” new privately funded, government-chartered companies to back individual loans.

“We wanted to put forth a structure we think that has elements in it that respond to a lot of the discussion and debate on Capitol Hill,” Mortgage Bankers Association President John Courson said in an interview.

Putting the “full faith and credit” of the U.S. Treasury behind a portion of the $1.8 trillion non-agency mortgage market would help boost a once-dominant form of home-loan financing that almost collapsed in 2007 as delinquencies rose. The association, which represents about 2,400 lenders, mortgage brokers, commercial banks, thrifts and other companies, said the importance of housing to the U.S. “economic and social fabric” warrants a federal government role in mortgage liquidity.

“There’s a lot of white canvas that has yet to be painted on,” said Courson, who is also president and chief executive officer of Central Pacific Mortgage Co. in Citrus Heights, California. “. We don’t have all the answers. We just wanted to put a structure out there to guide the debate.”

Fannie, Freddie

The new structure would remove the credit risk from the mortgages and leave investors with the interest-rate risk, the association said in the report. In a separate statement, the group said the government guarantee is intended only to support “products needed to keep the secondary market for core mortgage products liquid and functioning.”

The infrastructure of Fannie Mae and Freddie Mac should be used as a foundation for the new initiative, the association said. Washington-based Fannie Mae was created in the 1930s under President Franklin D. Roosevelt’s “New Deal” plan to revive the economy. McLean, Virginia-based Freddie Mac was started in 1970, largely to create competition for Fannie Mae.

The companies were designed primarily to lower the cost of home ownership by buying mortgages from lenders, freeing up cash at banks to make more loans. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.

Good Bank/Bad Bank

The Mortgage Bankers Association said it advocates a “good bank/bad bank resolution” for the companies. Two or three mortgage credit-guarantor entities should be created to replace the companies, the association said. The entities would own and guarantee loans that they then package into bonds. A new agency similar to Ginnie Mae would then guarantee those securities, according to the association’s plan.

Fannie Mae and Freddie Mac, which own or guarantee about $5.2 trillion in residential mortgage debt, were seized by regulators a year ago as their losses threatened to further disrupt the housing market. The companies have booked a combined $165.3 billion in quarterly net losses over the past two years and have received or requested $95.6 billion in taxpayer aid since November.

The Obama administration and Congress are considering options to restructure the companies, which are relying on an investment and credit package from the Treasury Department that is set to expire at the end of the year. The options include a wholesale liquidation and splitting off the companies’ bad assets into a separate government-backed entity.

No “Underlying Value”

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has said he may look to use the companies to boost subsidization of rental housing.

Fannie Mae and Freddie Mac fell in New York trading this week after FBR Capital Market’s Paul Miller said the mortgage- finance companies have no “underlying value” to justify a more than tripling in their share prices this month.

“There is no fundamental value remaining in Fannie and Freddie, particularly since the government owns 80 percent of each company,” Miller, a banking analyst based in Arlington, Virginia, said in an August 31 note to investors.

Fannie Mae has dropped 22 percent this week, closing at $1.59 yesterday on the New York Stock Exchange, after more than tripling in the previous four weeks. Freddie Mac is down 21 percent this week to $1.90 after a similar rally.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.