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Rep. Garrett Lays Out Plan for Fast-Tracking Housing Finance Reform

The chairman of the House subcommittee responsible for matters related to the nation's two largest mortgage financiers unveiled his plan Thursday for reforming the secondary mortgage market and winding down ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com.


""Rep. Scott Garrett"":http://garrett.house.gov (R-New Jersey) leads the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises. According to Garrett, there's no question that the GSEs should cease to exist, and he says it's time to put a plan into place to ensure private investors are ready to take up the slack once they're gone.

Garrett stressed that government guarantees for mortgages have forced taxpayers to foot the bill for massive bailouts. Estimates released Thursday indicate Fannie and Freddie could require as much as $311 billion by the end of 2014. Private investment, according to Garrett, will protect U.S. taxpayers from such dues.

""The government-sanctioned duopoly of Fannie and Freddie is not only systemically dangerous to our economic security, it's un-American,"" Garrett said in a statement. ""For too long the government's manipulation of the housing market has crowded out private market participants at the expense of the American taxpayers.""

The House lawmaker has outlined a three-part plan. First, he says the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) must standardize mortgage securitization by creating specific categories of mortgages with consistent underwriting requirements for each, and developing uniform securitization agreements and representations and warranties.

Garrett says FHFA should streamline the process for securities that meet the defined underwriting characteristics and use the standard agreements. His last directive under the standardization point is likely to draw the most ire: abolish the risk-retention provisions included in Dodd-Frank.


Secondly, Garrett says secondary market players must ""ensure rule of law and legal certainty"" by removing conflicts of interest between servicers and investors, clarifying rules around second lien mortgage obligations, and mandating arbitration between investors and issuers for all rep and warranty disagreements.

Regulators cannot unilaterally force investors to reduce the principal of loans they've invested in, according to Garrett, and servicers' accounting and reporting procedures must be standardized for all loan restructurings, modifications, or workouts. Both of which will support legal certainty for private investors, Garrett says.

The third part of Garrett's plan calls for additional transparency and disclosures. He says the quality of loan level data and other information used by investors to evaluate the value of mortgages must be improved. Garrett also wants investors to be privy to pricing history on securitization deals, and he advocates for the creation of individualized markers to distinguish each loan within a pool.

Garrett says 95 percent of the mortgage market is in the hands of the government right now, taking into account the position of the two GSEs as well as the ""Federal Housing Administration"":http://www.fha.gov. With such skewed government vs. private sector participation, ""we haven't fixed anything,"" Garrett said on CNBC's ""Squawk Box"" program Thursday.

Garrett expects his plan to pave the way for less government and more private involvement in the mortgage marketplace, but it's exactly this disproportionate allocation of financial support that leads some in the industry to err on the side of caution in mapping out the future of the nation's housing finance system.

""The GSEs will, in the short term, continue to play a vital role in terms of providing liquidity to the marketplace,"" commented Ed Delgado, CEO of the ""Five Star Institute"":http://www.thefivestar.com. ""Any abrupt action can be detrimental to the financial markets and signal more uncertainty.""

Together, Fannie Mae and Freddie Mac provide more than $5.7 trillion in funding for the U.S. mortgage markets and financial institutions. Those are the latest figures from the federal government.

""You have to measure the deconstruction of the GSEs relative to the impact on the housing and national economy. We’re not just shutting off a light switch,"" Delgado says.

_*Editor's Note: The Five Star Institute is the parent company of DS News and DSNews.com._

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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