WASHINGTON, February 11, 2025 – The Structured Finance Association (SFA), a leading trade association representing the structured finance and securitization industry, said the federal government needs to protect financial markets from unruly disruptions if it decides to remove Fannie Mae and Freddie Mac from conservatorship.
Mortgage giants Fannie Mae and Freddie Mac, also known as Government Sponsored Entities or GSEs, have been under federal conservatorship since the global economic crisis in 2008. SFA warned that releasing them from government control without applying needed reforms could be harmful to investors and the public.
“The private U.S. securitization market is the envy of the world,” said SFA CEO Michael Bright. “But for ‘reform’ and ‘privatization’ of GSEs to be more than buzzwords, barriers to private capital must be center stage. Otherwise GSE reform would be an accounting gimmick that would put Washington D.C., behemoths at the helm of our nation’s housing market.”
SFA today issued a set of key principles for GSE Reform:
- GSE reform should focus on preserving the private market and not merely on releasing Fannie Mae and Freddie Mac from conservatorship.
Doing nothing more than privatizing Fannie and Freddie would allow them to grow their market share in high credit quality loans and abandon lower end borrowers to the Federal Housing Administration (FHA). That would expand the FHA, which is notorious for exposing taxpayers to excessive risks.
- Release from conservatorship for the GSEs should be accompanied by lower loan limits on the mortgages they can guarantee.
Washington-based, government-backed entities should not be facilitating the purchase of million-dollar homes. That does nothing to make housing more affordable, which is the mission of Fannie and Freddie.
- Release from conservatorship should be accompanied by sensible restrictions on the activities of GSEs.
Just last year, Freddie Mac sought permission to purchase second lien home equity loans, which are consumer loans that use homes as collateral. Post-conservatorship rules should guard against such mission creep in this and other areas.
- Credit risk transfer (CRT) securities from the GSEs, which are pre-funded, and clearly defined forms of insurance that are often cheaper than equity, should be retained.
CRT is not a replacement for equity, but it is an important part of a diverse and well-managed risk mitigation regime.
- The Securities and Exchange Commission should rethink and revise at its reporting requirements for the private market.
Investors are right to demand that reporting standards not be degraded. But something is amiss with the SEC’s Reg AB II, which governs disclosures about asset-backed securities for the mortgage market, because no deals that are subject to the rule have been issued since the rule’s implementation.
- The well-functioning forward (“TBA”) market needs to be kept liquid and intact.
If credit concerns of the underlying issuers are suddenly in play, it is difficult to see how that could be done without disruption, especially to the relatively new Uniform Mortgage-Backed Security (UMBS.)
These principles aim to balance the role of GSEs in promoting affordable housing with the need to safeguard taxpayers and foster a robust private securitization market.
About the Structured Finance Association:
With more than 370 member institutions comprised of accounting firms, broker/dealers, diversified financial intermediaries, investors, issuers, IT vendors, law firms, mortgage insurers, other small financial institutions, rating agencies, servicers, and trustees, SFA is the leading voice for the securitization industry.
SFA is focused on helping grow the real economy and improving the lives of individuals, families, businesses, and communities across the nation; helping make credit more affordable and available to people who need it to finance some of life’s biggest goals — education, car purchases, starting a business, buying a home — or reduce their debt through consolidation loans; safeguarding essential protections for consumers and the financial system; facilitating valuable dialogue among the financial services market, its practitioners, policymakers and the broader public; and recognizing that all finance entails risk, but it should not involve recklessness.
For inquiries, please contact:
Walt Cronkite, Director of Communications, SFA