H.R. 2575, the Secondary Mortgage Market Enterprises Regulatory Improvement Act

SEP 02 1998 10:40 FR MORTGAGE BANKERS ASSO

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Question from Congresswoman Brown-Waite to John Courson:

Could you explain the difference between the primary and secondary markets for mortgages and the respective roles of mortgage bankers, such as yourself, and Fannie and Freddie?

Mr. Courson:

The primary mortgage market is the market in which lenders such as mortgage bankers make, or originate, loans to homebuyers and homeowners.

Mortgage bankers originate mortgage loans. We solicit borrowers, and borrowers who want mortgages solicit us. We have direct contact with borrowers. We educate consumers and counsel them about what types of loan might be appropriate for their needs. We take loan applications, process them, underwrite loans, arrange loan closing services, and we fund mortgage loans. That is the primary mortgage market.

A mortgage banker, after funding and closing a loan, often wants to sell it in order to get liquidity to fund another loan. Buying loans from mortgage bankers and thus supplying liquidity to make additional loans is the function of the secondary mortgage market. Fannie Mae and Freddie Mac are the dominant secondary mortgage market participants.

It is important to understand that the secondary mortgage market is a financial market rather than a consumer market. Fannie Mae and Freddie Mac buy loans that have already been made. They could sell the loans, but it is more practical to securitize them. To securitize loans, Fannie Mae and Freddie Mac pool a number of loans, use them as collateral for securities, then guarantee the securities. Guaranteed, mortgage-backed securities are more liquid that the mortgage loans themselves. Fannie Mae and Freddie Mac sometimes hold the mortgage-backed securities (MBS) they create, and sometimes they buy each other's MBS. They finance their activities by selling debt securities.

Congress has prohibited both Fannie Mae and Freddie Mac from originating loans, but has never defined the term "originate." We believe it is important for Congress to develop a regulatory system that ensures that the GSES adhere to their secondary market purpose, and that they not use their size, wealth, and other benefits of their government-sponsored status to compete with mortgage bankers in the primary mortgage market.

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Question

As we consider an independent regulatory structure within Treasury, I have looked at the examination budgets at OCC and OTS. I understand those bank regulatory agencies spend around 2/3rds of their budget on pure examination staffs. What percentage of your budget goes toward examination?

Answer

OFHEO 's allocation of resources to the direct supervision of Fannie Mae and Freddie Mac is comparable to the resources that the OCC and OTS allocate to supervising the financial institutions that they regulate. Information contained in each agency's FY 2003 Performance Plan facilitates a direct comparison.

OFHEO allocated 87% of its FY 2003 budget on the direct supervision of Fannie Mae and Freddie Mac. OFHEO's FY 2003 Performance Plan allocates resources to three Strategic goals: 1) Ensure the Enterprises comply with safety and soundness standards and are adequately capitalized, 2) Enhance public understanding of the nation's housing finance system, and 3) Contribute to Federal efforts to promote efficient and effective financial markets and homeownership. Strategic Goal 1 encompasses all of OFHEO's efforts in the direct supervision of the Enterprises.

The OCC's FY 2003 Performance Plan allocates the agency's resources to four program activities (Supervise, Charter, Regulate, and Analyze Risk). The Supervise program area includes all activities that relate to the ongoing supervision of individual national banks, including activities to ensure capital adequacy. The OCC allocated 84% of its FY 2003 budget for this activity.

The OTS's FY 2003 Performance Plan allocates the agency's resources to the accomplishment of four strategic goals: 1) A safe and sound thrift industry, 2) A flexible regulatory framework...., 3) Fair access to financial services, and 4) A motivated and expert workforce. The strategic goal of ensuring a safe and sound thrift industry (Strategic Goal 1) includes all activities that relate to the ongoing supervision of individual thrifts, including activities to ensure capital adequacy. The OTS allocated 86% of its FY 2003 budget to achieve this goal.

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