Keeping Congress from throwing the baby out with the bathwater is always a challenge. When the babies in question are named Fannie Mae and Freddie Mac – whom many on Capitol Hill are more tempted to drown than save – the challenge gets even tougher.
So it’s fortunate, then, that Michael Berman made a career guiding complex deals from big idea to dry ink.
Berman, a former lawyer and current president and chief executive officer of CWCapital in Needham, was elected chairman of the national Mortgage Bankers Association (MBA) last month. His chairmanship comes during a particularly tumultuous era for the industry, with the conservatorship of Fannie and Freddie, the sub-prime collapse and a raft of regulatory changes both underway (Dodd-Frank) and on the way (the reform of the government-sponsored entities).
Not surprisingly, those two items form the top of Berman’s agenda.
“Those are probably the two biggest issues I’m concerned about,” Berman told Banker & Tradesman. “There’s lots of others, but the whole issue of [Fannie and Freddie] and the secondary market, and the whole issue of risk retention and what those regulations are going to look like – those are the two most dramatic, by far.”
The Dodd-Frank legislation contains a provision requiring lenders to retain a portion of the risk when they securitize loans. Though the industry has successfully lobbied for an exemption for conforming loans from those risk retention requirements, the exact definition of what conforming will be has yet to be determined. Little more than six months remain before regulators have to reveal the new rules.
Small changes in the definition can produce big shifts in the market, and Berman says that worries him.
“One of the interesting subtleties here is that FHA loans are carved out. So you don’t have any risk retention for an FHA loan,” Berman said. “If qualified mortgages are defined too narrowly, then all the small banks and the mortgage bankers….are going to want to do all FHA loans.”
From GSE To MCGE
On the issue of the Fannie and Freddie, Berman has been involved in efforts to shape their reform plan for more than two years. Shortly after Fannie and Freddie went into conservatorship, the MBA formed a working group called Council on Ensuring Mortgage Liquidity to help formulate a coherent industry proposal for the future of the government sponsored entities (GSE).
The group released a white paper last year outlining a proposal for the replacement of the GSEs – a more restrained, and creative, vision of reform than more radical alternatives advocating taking government out of the mortgage market. Berman has testified before Congress and met several times with Treasury and congressional representatives to go over the group’s ideas.
The group’s proposal involves the creation of several privately owned, but government-chartered and regulated, mortgage credit-guarantor entities (MCGE). The MCGEs would fulfill the market-making role occupied today by Fannie and Freddie, purchasing mortgage loans and creating securities from them. But MCGE securities would come with an explicit, government-guaranteed “wrap” similar to the way Ginnie Mae loans are guaranteed.
MCGEs would not be able to invest in riskier securities, such as those formed from Alt-A and sub-prime loans, and hold them in their portfolios for their own profit – one of the principal causes of Fannie and Freddie’s tremendous losses.
Though the proposal does not set a specific number of MCGEs, the intent, Berman said, would be to have enough to help foster competition in the secondary market and make sure that no one entity would become “too big to fail.”
The plan is intended to preserve a liquid secondary market for core mortgage products even in periods of financial turmoil, by making sure the securities made from such loans are explicitly government guaranteed. At the same time, the plan aims to tamp down risky behavior on the part of the entities by ensuring that federal guarantee wouldn’t kick in until and unless the private capital backing the entity was lost.
A Long Way To Go
The proposal is “really Michael’s brainchild,” said Regina Lowrie, founder of Vision Mortgage Capital in Pennsylvania and former chair of the MBA. “He put it together, [and] really drove the discussion. I think he’s put the MBA really in front of that whole discussion on Capitol Hill and with the regulators.”
Subsequent proposals by other advocacy and trade groups have closely followed the principles the MBA has laid out, according to Berman.
“There’s folks on the right and folks on the left who disagree, but I would say there’s 80 percent in the middle who have largely supported [us],” he said, lending hope that the framework the MBA has laid out will be part of the administration’s plan.
The Obama administration’s proposal on the GSEs will come out in January. The MBA has been working with Treasury and the FHA to influence it, Berman said.
“We think, based on people’s reactions – as well as the fact that they keep inviting us back and asking more questions – that they see a lot of merit in our proposal,” Berman said, though the agencies are keeping their plans “very close to the vest.”
“I think there’s some basic elements of our proposal that we’ll see. We haven’t talked about who would own these MCGEs, but the concept of having bank co-ops [similar to the Federal Home Loan Banks] that could own them would be interesting,” he suggested. “For the smaller, community banks – having a competitive landscape where they can sell their loans is an important aspect that we’re looking at.”
Berman is confident that the MBA’s ideas have resonated with the administration and others in the marketplace.
But “there’s a long way to go,” he acknowledged. “Getting something passed in the next 12 months would be a huge accomplishment."
