Ratings Agency Sees Promise in Corker’s Bill for Housing Finance Reform

Sen. Bob Corker (R-Tennessee) ""introduced legislation in early November"":http://dsnews.comarticles/senate-proposal-calls-for-winding-down-of-gses-2011-11-11 aiming to wind down Fannie Mae and Freddie Mac and replace the ""Mortgage Electronic Registration System"":http://www.mersinc.org (MERS) with a new government-run registry.

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According to the ratings agency ""DBRS"":http://www.dbrs.com, Corker's proposal could give the private market for mortgage securitizations a much needed boost, and the creation of a new MERS database could ease investor concerns over the legal battles facing the original system.

Corker’s “Residential Mortgage Market Privatization and Standardization Act” calls for Fannie and Freddie to reduce the percentage of newly issued mortgage-backed securities (MBS) they guarantee each, in terms of total loan principal. The percentage guaranteed must be brought to zero within 10 years, at which point the MBS market for new issues would be wholly privatized.

“We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008,” Sen. Corker said when he laid out his proposal. “We’re introducing this bill to lay down a marker and get a conversation going that Washington has put off for far too long.”

The bill also directs Fannie and Freddie to sell their technology, home price indices, and systems to private investors, DBRS explained, and it would initiate a process for creating deliverability rules and technology necessary

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for a “to-be-announced” (TBA) futures market with no government guarantee.

“[T]hrough winding down the GSEs, the bill allows private capital to regain and eventually take over the housing market,” the ratings agency said in a research note issued Monday.

In addition, DBRS says Corker’s bill takes steps to bring uniformity and transparency to the housing market.

It would replace the Qualified Residential Mortgage (QRM) and risk retention requirements mandated under the Dodd-Frank Act with a 5 percent minimum down payment and full documentation requirement.

The bill would also create an industry-financed database that makes uniform performance and origination data on mortgages available to the public the Federal Housing Finance Agency (FHFA).

Corker’s proposal would also create a uniform pooling and servicing agreement (PSA) and a new electronic registration system (MERS 2) where all loans are transferred under one system regulated by the FHFA.

Federal regulators would be instructed to develop uniform practices and streamline mortgage regulations related to the MBS market and the pooling and transferring of mortgages.

“If adopted, DBRS believes the bill may increase the volume of private mortgage securitizations. Furthermore, the creation of a uniform PSA and a universal electronic registration system will address legal issues related to the securitization of mortgages and may create more certainty in the securitization process,” DBRS said.

The ratings agency noted that the current MERS registration system is listed as the owner of record and nominee on over 50 percent of all outstanding U.S. mortgages, but has come under fire in several jurisdictions with regards to its ownership status and ability to assign mortgage interests.

DBRS says the creation of MERS 2 has the potential to resolve issues regarding the ownership and assignment of mortgages, which may alleviate MBS investor concerns regarding foreclosures on loans assigned by MERS.