A Closer Look: Why the Housing Market Needs Securitization

Ideas on how to reform the housing market have been circulating for quite a while. Though the search will likely never be over, as the market is always changing, procedure put forth by the Federal Housing Finance Agency (FHFA) as the regulator for Fannie Mae and Freddie Mac, addresses the two most common steps to minimize risk, according to the Urban Institute. First, requirements regarding institutions that issue mortgage-backed securities to share most of the related credit risk with others in the private market and second, having government or government-like utility manage the infrastructure used in issuing the securities.
The brief written by the Urban Institute said the FHFA has developed a process that ensures the GSEs are sharing risk equally, but is also in the beginnings of building a platform that handles much of the securitization functions that are provided by Fannie and Freddie.
The joint venture referred to as Common Securitization Solutions to design a Common Securitization Platform (SDP) will manage all data, issuance, settlement, bond administration, and disclosures associated with single-backed security. Though Fannie and Freddie will maintain loan-level control of the loans they purchase after completion, they will still determine the types and terms of the loans they take on, including what happens if the loan goes into foreclosure.
The hope of this platform is that is will modernize the housing finance system’s securitization infrastructure, therefore lowering the costs and increasing the efficiency, according to the brief. The current reliance on Fannie Mae and Freddie Mac will shift to the technology, however, as long as the two are the only ones that can access the platform, they will fall short of reform potential because of the benefits of the improved infrastructure. The duopoly already dominates the guarantee market because of their dominance in the securitization market and they fall under too-big-to-fail, and the GSE’s being the only ones using the platform, it will further establish their dominance.
“The work that Fannie, Freddie, and the FHFA are doing on the CSP is vastly underappreciated, both for the meaningful impact that it will have on today’s system if it continues along its current course and for the much greater impact that it will have on a reformed system if its course is adjusted with that larger role in mind,” the brief said. “Their work deserves the kind of critical attention that we have given the credit risk transfer process, so that as with that process, we can finally come to understand its promise and challenges and the central role that it could play in the system of the future.”
To read the brief in full, click here.

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