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DeMarco Addresses Future of ‘Broken’ Secondary Market in Speech

In prepared remarks delivered before SIFMA members Thursday, ""Federal Finance Housing Agency"":http://www.fhfa.gov/ (FHFA) Acting Director Edward DeMarco addressed the current state of the secondary mortgage market and the agency's steps toward building a better market for the future.

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Part of the process of improving the market is by bringing the ""conservatorships to a conclusion,"" while strengthening the private sector's role in housing finance, DeMarco contended.

Since the conservatorships of Fannie Mae and Freddie Mac were intended as a short-term solution to provide stability to the mortgage market, DeMarco explained the importance of creating a more competitive market.

Currently, DeMarco said the ""government touches more than 9 out of every 10 mortgages.""

""[I]f we really are serious about expanding the private sector's role in housing finance, we must consider what types of changes are necessary to bring private capital back to the housing finance market,"" DeMarco stated.

As it now stands, DeMarco said, ""The secondary mortgage market infrastructure that served this country for many years is broken.""

""Our goal is to energize the rebuilding of the secondary mortgage market so that market participants may again compete with each other to ensure an efficient flow of credit for housing, confident in the knowledge of the risks involved and the rules in place,"" he added.

In his remarks, DeMarco recapped steps FHFA has taken to address issues crippling the infrastructure of the secondary mortgage market.

First, DeMarco pointed to an FHFA ""white paper"":http://www.fhfa.gov/webfiles/24572/FHFASecuritizationWhitePaper100412FINAL.pdf that proposed a framework for a new securitization platform.

The white paper suggested replacing the current infrastructures with a more efficient model.

The new structure would be ""operable across many platforms, so that it can be used by any issuer, servicer, agent, or other party that decides to participate,"" DeMarco explained.

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""[T]he focus of the platform could be on functions that are routinely repeated across the secondary mortgage market, such as issuing securities, providing disclosures, paying investors, and disseminating data, he added.

Such standardization, he said, ""could have clear benefits to market participants.""

DeMarco then turned attention to the contractual framework, and again, underscored the importance of standardization.

""[G]reater standardization in certain contractual terms could add more liquidity and more certainty to the market,"" he said.

DeMarco then highlighted initiatives from FHFA, and said the ""initiatives fit into various parts of a new infrastructure for housing finance.""

One agency initiative the Uniform Mortgage Data Program, which seeks improve the ""consistency, quality, and uniformity of data collected.""

""Developing standard terms, definitions, and industry standard data reporting protocols will decrease costs for originators and appraisers and reduce repurchase risk,"" he stated.

Another initiative DeMarco discussed was the Servicing Alignment Initiative, which gives mortgage servicers one set of procedures to follow when servicing GSE loans.

The Joint Servicing Compensation Initiative was also noted, which was introduced to consider changes on how servicers are compensated to improve market competition in servicing.

DeMarco also discussed the current representation and warranty model, stating it should be clear that it needs reform.

""For the market to reclaim the strength it once had, the representation and warranty model needed to be improved,"" he said. ""Lenders want more certainty about their risk exposure and the Enterprises want to ensure the quality of the loans delivered to them.""

This need for reform, he explained, is why FHFA and the GSEs announced plans for a new representation and warranty framework for conventional loans sold or delivered on or after January 1, 2013.

""Finally, for private capital to return to the mortgage market, I believe that investors will demand more data on mortgage characteristics and performance,"" DeMarco said.

The Loan-Level Disclosures Initiative was created to fulfill the need for better data on GSE mortgage-backed securities (MBS) for investors. The initiative aims to provide information on GSE-backed securities starting at the time of origination and throughout a security's life.

""With better information, private investors can more efficiently measure and price mortgage credit risk, which will likely be essential to attract private capital back to replace the government's enormous footprint in the market today,"" he said.

About Author: Esther Cho

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