Mortgage plan seeks single securities platform

The Financial Times wrote an article about the push by the Federal Housing Finance Agency (FHFA) to create a data warehouse for mortgage backed securities.

Regular readers know that your humble blogger has been advocating for the creation of this data warehouse since before the financial crisis (full disclosure:  I have a US patent that may cover this data warehouse; however, patent or no patent, a data warehouse is needed if a new model for mortgage backed securities is to emerge that doesn't have the problems that exist with the current model).

The US may create a public utility to process all mortgage securitisations in the future after the main regulator of housing finance said it wants to invest in a single platform. 

In a strategic plan published on Tuesday, the Federal Housing Finance Agency said that it aims to build a single securitisation platform for Fannie Mae and Freddie Mac, the two housing finance agencies that guarantee and bundle most US mortgages. 

The plan points to a revolutionary future for the $8,500bn US mortgage-backed securities market, in which all public and private issuers use a single platform to process and track payments from mortgage borrowers through to MBS investors, and Fannie and Freddie may no longer exist.

The platform should track and provide reports on the mortgages on an observable event basis.  An observable event for a mortgage includes, but is not limited to, a payment, delinquency, default, bankruptcy of borrower, or modification.

By tracking and reporting on an observable event basis, users of the data always have current information on the performance of the underlying mortgages.

Fortunately, observable event based data is obtainable from the mortgage servicers because this is the way their loan databases are designed -- they already track and report observable events for each mortgage.

“Right now, Fannie and Freddie each have their own proprietary systems,” said Edward DeMarco, acting director of the FHFA. He said it made little sense for taxpayers to keep investing in two different platforms when they could instead build a single system that could be used regardless of whether Congress keeps Fannie and Freddie or scraps them. 

“It’s about building out an infrastructure for the secondary mortgage market but doing so in a way that is not dependent on any particular policy path,” said Mr DeMarco. In the medium-term, such an infrastructure could mean a single agency MBS, instead of different Fannie and Freddie securities....

The role of the state-backed US mortgage originators has come under the microscope. 

Politicians across the spectrum in the US want to scale back the government’s role in guaranteeing mortgages but Congress has not yet decided whether to keep Fannie and Freddie or scrap them. ... 

“We want to gradually shift some of the mortgage credit risk that Fannie and Freddie are taking on today back to the private market,” said Mr DeMarco....

The data warehouse is the key to bringing back the private market for mortgage backed securities.  With observable event based reporting, market participants can actually independently value these securities.  This is the first step in making an investment decision.