Mortgage Market Standardization and the Common Securitization Platform
This is a time of substantial progress in the mortgage market – progress that's very real, even if it's not very glamorous. In the words of Freddie Mac CEO Don Layton, all of us in this industry are "present at the creation" of a better and more resilient system of mortgage finance. And it's one that can last for many years if we do it right.
The Benefits of Standardization
A key to our ongoing progress is standardization. Under the guidance of our regulator and conservator, the Federal Housing Finance Agency (FHFA), Freddie Mac and Fannie Mae (the GSEs) have taken major steps to align many of our standards and practices so as to improve the efficiency, accuracy, and transparency of the housing finance system. For example:
- The Uniform Mortgage Data Program is standardizing mortgage delivery data, servicing data, securitization disclosures, and appraisal data. By enhancing confidence that the data backing up loans meets consistent, specified standards, this program benefits the industry, the GSEs, and the taxpayers as well.
- The Servicing Alignment Initiative established consistent policies and processes for servicing delinquent loans owned or guaranteed by the GSEs. It is helping servicers to resolve delinquencies more consistently and efficiently, keep more borrowers in their homes, and minimize losses to the GSEs and taxpayers.
- Contract Harmonization is making it more predictable, transparent, and efficient for the industry to do business with the GSEs. The new framework encourages more consistent quality control and protects us and the taxpayers from the credit risk of loans not underwritten to prescribed standards.
The Common Securitization Platform
Now we are working at FHFA’s direction on the biggest shared step yet: the design and build of a common securitization platform (CSP) that will replace the GSEs’ two proprietary systems for securitizing mortgages and performing associated back office and administrative functions in the mortgage value chain. By providing the right kind of standardized “utility” approach, the CSP will reduce costs, improve transparency, and lower barriers to entry for private market credit risk takers – and it will benefit taxpayers, borrowers, and the broader housing finance system. This initiative has great policy significance even beyond the GSEs. With it, competition among credit guarantors is likelier in the future; without it, such competition has less of a chance to develop.
The Limits of Standardization
Building the CSP entails many important choices about what’s properly within its scope – and thus should be commoditized – and what’s outside the platform’s scope, and thus will remain in the realm of competition. These are very consequential decisions. Too narrow a platform and it won’t live up to its potential to create efficiencies and attract private capital. Too broad a platform and some functions will become commoditized that could have been sources of innovation and competition. Given the unequal starting points of potential participants, this could stunt competition in the future.
Here are the kinds of decisions we’re talking about. Most people think issuance of securities belongs in the CSP, and that standardizing this function will reduce risk, support demand, and increase liquidity. Most also believe such matters as credit models, pricing, and customer relationships should be left outside the platform, as they are prime sources of differentiation, innovation, and competition between participants.
It takes skilled and attentive guidance to make these decisions wisely. They will influence not only how the GSEs approach the platform today, but how well it attracts private participants tomorrow. These decisions will also influence whether the CSP lowers barriers to entry or unintentionally reinforces them. So it’s good to see the care and skill with which FHFA is steering this effort. They know what they want to achieve with the CSP. They are consulting closely with the GSEs in technical areas of our subject matter expertise. And they are driving the process forward with a nuanced understanding that while standardization is a good thing, even good things can be overdone.
A key public policy goal here is to attract more private investors in mortgage credit risk and limit the current concentration and taxpayer risk of Fannie Mae, Freddie Mac, and Ginnie Mae. The CSP as a physical and possible policy platform is designed to attract those mortgage credit investors by creating more confidence in the overall securitization process including disclosure. Freddie Mac has been asked to help design, build, and implement this platform in a way that makes no assumptions about our own future state. Our future is still to be determined – but our experience and expertise is needed now by our regulator and our country.
It’s exciting to be part of this important endeavor. We are present at the creation of something truly significant. And we have a real opportunity to get it right.
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