Goodbye Fannie & Freddie: Hello MCGE (Diana Olick Report)
Diana Olick is one of my favorites at CNBC. She has covered the mortgage and foreclosure crisis more ably than anyone on financial television the past 24 months, and she has built substantial credibility simply by telling the truth without hype.
If you haven't seen this story yet, the MBA, has been shopping a reform proposal around Washington that would fundamentally shift GSE mortgage risk from taxpayers to the private sector through the creation of MCGEs (mortgage credit guarantor entities). The chief architect of the MBA's plan Michael Berman stepped up for an interview yesterday to explain the proposal.
Let's start at the very beginning, with the MBA press release:
- The centerpiece of MBA’s recommendation is the creation of a new line of mortgage-backed securities (MBS). Each security would have two components – a loan level guarantee provided by privately-owned, government-chartered and regulated mortgage credit-guarantor entity (MCGE) and a security-level, federal government-guaranteed wrap.
America, meet the MCGE, and yes, that's pronounced McGee, and perhaps aptly, as it aims to provide fast food for hungry investors who are currently quite risk averse when it comes to buying pools of mortgages.
Simply put, the MCGE buys mortgages from banks, pools them into securities, pays an insurance premium to a new government fund and then sells them to investors with government guarantees against the default of those securities. So the investors take the interest rate risk but they are not taking a credit risk.
Like I said, it's careful, but it would also involve dismantling the behemoths, Fannie and Freddie, and transferring the intellectual capital there, as well as the servicing relationships and the systems, i.e. the good assets, to the MCGEs and cordoning off the bad assets to be dealt with otherwise. Sort of like the good bank, bad bank model of the S&L crisis.
The MBA has already shopped this across DC, stopping at Treasury, the White House and the Federal Reserve. Berman says the Administration is, "in a listening mode," but he adds, "they did say that they did feel this was the first plan that had really connected all the dots, and they listened carefully and asked lots of questions."
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Sep 3, 2009 at 2:58 AM
Reader Comments (5)
http://www.chinastakes.com/2009/8/as-bank-credit-ebbs-is-the-stock-market-bull-doomed.html
http://features.csmonitor.com/economyrebuild/2009/08/31/ethnic-malls-are-buzzing/
As far as MCGE goes, I'm not sure what to think yet. It takes more than a friendly-sounding Irish name to get my support. I guess the biggest question I have, is what does the incentive structure look like. When you pay people good money to make bad loans, it will always be a recipe for disaster.
$400 Billion....that is so much money...we could be acquiring natural resourcees for the next century like China, instead we're bailing out the housing bubble...