Many of the suggestions outlined in the proposal are similar to a
floated by Sens. Bob Corker (R-Tenn.) and Mark Warner (D- Va.) and recommendations made by the Bipartisan Policy Center Housing Commission earlier this year.
Under the system envisaged, private, monoline insurers will bear credit risk for mortgage-backed securities. The insurers will purchase catastrophic insurance from the government for a guarantee fee, or G-fee. The government backstop will ensure that MBS investors are paid when insurers become insolvent, but the insurers will not have any kind of government backing and will be allowed to fail -- essentially private capital takes the first hit.
The government will also run a mortgage-securitization platform that builds on efforts to create a single platform for Fannie Mae and Freddie Mac securities. A common platform would ensure greater standardization, making it easier to modify loans if needed in economic downturns, the authors said. A uniform servicing standard is expected to encourage prudent underwriting as well.
The system will also have a new regulator called the Federal Mortgage Insurance Corporation that will oversee MBS insurers and the securitization platform.
"Decisions made about the future of the mortgage finance system will affect U.S. homeowners and the broader economy for decades," the authors wrote, urging policymakers to embrace the core tenets of the proposal. "Inaction also represents a decision, since leaving Fannie Mae and Freddie Mac in conservatorship means the effective nationalization of the U.S. housing finance system. Such a course would penalize American families looking to buy homes and leave taxpayers exposed to excessive housing risk."
-- Written by Shanthi Bharatwaj in New York.