On June 3 Fannie Mae and Freddie Mac carried out the most momentous change in mortgage finance since the emergence of mortgage backed securities in the 1980s and shifted their bond production into a single security, the so-called Uniform MBS (UMBS). If you weren’t paying attention, this passed without notice, which is a remarkable and impressive thing given the enormity and complexity of the move.
But it now confronts policy makers with a critical choice. Do they let Fannie and Freddie keep this upgrade of what will now become the nation’s primary securitization infrastructure? Or do they take the next logical step and put this critical infrastructure into the public’s hands? My co-authors and I in 2016 proposed A More Promising Road to Mortgage Finance Reform, in which precisely such a market utility , owned by a new government owned corporation, would take over all of the issuance functions for government supported lending, while relying on a broad array of private credit insurers to protect the government from mortgage loss risk in all but the most exigent economic circumstances. The successful launch of the UMBS makes the case for this path more compelling than ever.
The bonds were issued by the Common Securitization Platform (CSP) that the two companies developed through a joint venture supervised by the Federal Housing Finance Administration (FHFA). The change from bonds issued separately by the two companies was largely invisible to the general public, and probably to most congressional members who ultimately are responsible for the charters that govern the two companies. By all reports, it happened without incident – bonds were created, investors bought them, and worldwide investment in the US housing market continued without any hiccups. But not everyone is thrilled with the notion that this new platform and security will further strengthen the companies’ hold over the mortgage market. The companies’ ownership of the platform has already sparked demands by some mortgage industry players to open the system for others to use, and to force Fannie and Freddie to share currently proprietary data about their current MBS inventory so others can compete more effectively with them through the platform.
The successful launch of the UMBS presents the perfect opportunity to adopt our plan and move the platform into public ownership. Leaving the platform with Fannie and Freddie would cement their too big to fail status and place its ongoing support for mortgage finance in the hands of shareholder owned companies with powerful profit maximizing incentives – companies that have shown that they can fail and indeed are too big to be allowed to fail in their fully private forms. Taking the public ownership approach would remove this critical instrument of national economic security from private ownership and exploitation and insulate it from the risks of a repeat failure of the companies. If the platform is owned by a public corporation, it would continue to function even if one or more entities providing the credit insurance behind the bonds’ assets failed. Rather than betting the whole mortgage finance system on the solvency of a couple of private companies, our plan would protect the system’s critical “plumbing” while leaving genuinely private entities to shoulder the mortgage risks.
A single security and a single issuing platform have been a feature of every serious proposal for a post-conservatorship mortgage finance system. Until now, it has been only theoretically possible. Now it is a reality. There will never be a better time to take the next logical step to make this resource fully protected and available for securities backed by any qualified credit insurer by putting it in a publicly owned corporation.