Reviving the Secondary Market

Mortgage Banking

April 2009

Mortgage finance experts, regulators, lawmakers and industry groups are wrestling with the challenge of remaking the secondary mortgage market into a sustainable model for the long term.

By Robert Stowe England

Trust - once it's lost, how do you get it back?

For the world of mortgage finance, that is the paramount question. It is essential to the success of any efforts at reviving the secondary mortgage market on a sustainable basis with and without a federal government role.

Restored trust is essential in the near and mid-term to restarting the private-label mortgage-backed securities (MBS) market, which collapsed in August 2007. That is the part of the secondary market reserved for jumbo prime, alternative-A and subprime loans - the loan products that made up the once-formidable private-MBS market. And restored trust is essential in the longer term for whatever reforms and future roles lie ahead for the government-sponsored enterprises (GSEs) or their successors or replacements. Until trust is restored, investors will not feel confident enough to return to the U.S. mortgage securitization markets they fled.

Former Federal Reserve Chairman Paul A. Volcker summed up the despair in the financial markets to Congress' Joint Economic Committee on Feb. 26. "The rising debt, particularly mortgage credit, was facilitated and extended by the modern alchemy of financial engineering. Mathematic techniques that have [been] developed in an effort to diffuse and limit risk turned out in practice to magnify and obscure risks, partly because in all their complexity and opacity, transparency was lost," Volcker said.

For now, the U.S. government's greatly expanded role is keeping the wheels on mortgage finance while also powering it forward. For example, the GSEs - Fannie Mae and Freddie Mac - have greatly expanded their role in conservatorship out of necessity to help the foundering housing market find a bottom. The Federal Housing Administration (FHA) and Ginnie Mae have greatly expanded their roles as well.

In 2008, the GSEs' share of mortgage originations rose to 73.5 percent, according to Inside Mortgage Finance. In 2006, before the collapse of private-label, their share stood at less than 35 percent. In the fourth quarter of 2008, the government share of mortgage originations - FHA, Department of Veterans Affairs (VA) and the GSEs - stood at 92 percent, according to Inside Mortgage Finance. (When one counts homeequity loans, however, the FHA/VA/GSE combined share of all mortgages originated falls to 87 percent, according to Inside Mortgage Finance.

"We have effectively nationalized housing finance in the U.S., [where nearly] 95 percent of recent mortgages were touched by or guaranteed by the government," says Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies, Cambridge, Massachusetts. "Absent that, there would be barely a heartbeat of housing finance."

The gains in market share by the GSEs and FHA/Ginnie Mae are troubling to James B. Lockhart III, director of the Federal Housing Finance Agency (FHFA), whose agency oversees conservatorship of the GSEs and regulates them for safety and soundness.

"A very worrisome issue to any insurance program, but especially a government one, is very rapid growth, because it may indicate that risk is being underpriced," Lockhart told a meeting of the Association of Government Accountants in Washington, D.C., on Feb. 19.

For now, however, trust is so absent from the markets that only federal government guarantees, whether explicit or implicit as an effective guarantee in the case of the GSEs, along with massive interventions in terms of cash infusions by Treasury and purchases of mortgage securities by the Fed are keeping the market functioning. One could say the U.S. government is the mortgage market for now.

Absent government intervention, the amount of mortgage credit available would have cratered last September. Indeed, as Lockhart says, FHFA "could not have put Fannie and Freddie into conservatorship without Treasury's $100 billion Senior Preferred Stock Facility, which provides effective guarantees of the enterprises' debt and mortgage-backed securities by ensuring each enterprise has a positive net worth."

By mid-March, Freddie Mac had accessed about $13.8 billion from the Senior Preferred Stock Facility and had requested an additional $30.8 billion after reporting a $23.9 billion loss in the fourth quarter for 2008 and a $50.1 billion loss for all of 2008. Fannie Mae announced it will need $11 billion to $16 billion to cover its fourthquarter losses.

On Feb. 18, Treasury Secretary Timothy Geithner and President Obama announced that Treasury had doubled the Senior Preferred Stock Facility to $200 billion "to remove any possible doubt in the minds of investors that the U.S. government stands behind Fannie Mae and Fredthe Mac," Lockhart said.

Lockhart also reported that by late February the Federal Reserve Bank had purchased $115 billion in Fannie, Freddie and Ginnie Mae mortgage-backed securities as part of its plan to purchase up to $500 billion in agency MBS. The Federal Reserve has also purchased $30 billion in Fannie, Freddie and Federal Home Loan Bank notes as part of its plan to buy $100 billion in debt from the GSEs and home loan banks.

Indeed, since mid-November 2008, the extraordinary actions of the Fed in pledging to buy assets have driven down interest rates, and they have mostly remained lower.

A focus on rebuilding

With the mortgage market functioning on government steroids, attention has turned toward rebuilding the secondary market from the ground up so that it can function in the future without massive government involvement.

The Mortgage Bankers Association (MBA) took the lead last year in promoting discussion about the future of mortgage finance when it set up the Council on Ensuring Mortgage Liquidity. The council, made up of 25 leaders in the real estate finance industry, came together to work to provide a framework for renewing the secondary mortgage market, with an initial focus on the GSEs. The council is chaired by Michael Berman, CMB, president and chief executive officer of Needham, Massachusetts-based CWCapital and MBA vice chairman.

"The council's mission is to look beyond the current crisis to what a functioning market should look like for the long term," Berman wrote in a joint statement with John Courson, president and chief executive officer of MBA. The letter accompanied a white paper titled Key Considerations for the Future of the Secondary Mortgage Market and the Government Sponsored Enterprises, which was published in January 2009 to reflect ideas put forth at a Nov. 19, 2008, council event titled Ensuring Mortgage Liquidity: A Summit on the Future of the Secondary Mortgage Market and GSEs.

The summit's panel of economists, market experts and former regulators "did focus on the question of what went wrong, using that as a whiteboard to try to determine from what went wrong, what we need to do to fix the system," says Berman.

At this point, the blackboard for the future schematic outlining how the mortgage finance market will look is blank. People are in the early thinking stages and imagining what would work best - and how we get there from here.

The future of mortgage securitization, in the end, is likely to be strikingly different from the world that existed prior to August 2007 for the private-label market and September 2008 for the GSEs.

We may get a glimpse at just how receptive investors will be to new securitizations by watching the response to the $200 billion consumer-lending program known as the Term Asset-Backed Securities Loan Facility (TALF). In March, under the TALF program, the Federal Reserve Bank of New York began lending to owners of certain triple-A-rated asset-backed securities (ABS) backed by newly and recently originated auto loans, credit-card loans, student loans and Small Business Administration guaranteed loans. The Fed's support for the securitization of these consumer loans is expected to create new lending capacity for future loans.

The launch of TALF was preceded by the Feb. 10 announcement by the Federal Reserve and Treasury of plans to expand TALF to $1 trillion to support the securitization to include other asset classes. The Fed and Treasury indicated they expect the April funding to support ABS backed by rental equipment, commercial and government vehicle equipment, and agricultural equipment loans and leases. The Fed and Treasury have also been analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS).

Bring them to market

It's been hard to keep track of the many trillions of dollars in loans, guarantees and other efforts to stabilize the banks and the entire financial system. Yet, the Herculean efforts of the federal government to get banks to lend and credit to flow again continue to run aground of the so-called toxic mortgage securities and derivatives that banks still hold on their balance sheets - many of which are actually performing assets and "toxic" in name only.

Some observers believe that the securitization market, like bank lending, is not going to revive and prosper until banks and other institutions and firms that hold those assets can dispose of them at true market prices. That's the view, for example, of Robert Albertson, principal and chief strategist at Sandler O'Neill & Partners LP, New York.

Albertson believes a lot of financial pipes would come unclogged and a lot of investors would again be willing to buy mortgage securities and derivatives if the markets could place a market value on existing securities and derivatives that is more realistic than the distressed firesale prices that have occurred.

"It's simple, really," says Albertson. "All you have to do is capitalize a trading organization and start bringing assets to market."

Albertson contends that many good triple-? mortgagebacked assets, now going for 50 cents on the dollar in forced sales, "could get good prices" in a properly functioning bid/ask market. The startup costs would be low, as the effort starts out small and grows, Albertson contends.

The government could, for example, fund a Wall Street firm to the tune of $50 million or $100 million to get the market off the ground. It would, however, require government initiative - and so far the federal government has not been able to figure out how to sell the toxic assets without further creating systemic risks, leading to more markdowns at firms still holding the assets. Albertson is skeptical. "100 to 1, they'll never do it," he says. "The government has no conscious clue on how the private sector works," he says. Part of the problem is that few people in government have experience on Wall Street, so they cannot imagine how the process might actually work, he says.

How would it work? With a functioning market mechanism, the troubled securities are "really being transparently priced to the private sector through bid and ask," Albertson says. "The bank is saying, 'Here's my ask.' The buyer is saying, 'Here's my bid.' Eventually you get closure and price discovery," he says.

While recognizing that the TALF program eventually could help provide financing to buyers of the assets - as it is doing with ABS - the government role should remain limited to getting the market off the ground, he says.

"At some point it's self-defeating to have government funding. It has to run on its own. You have to take the training wheels off," Albertson says.

The call for transparency

The American Securitization Forum (ASF), New York, has been exploring ways since last year through its Project Restart to inject a massive new dose of transparency into the securitization market in an effort to help restore the investor trust and confidence needed to revive the private-label residential mortgage-backed securities (RMBS) market. The ASF advocates for the securitization industry's interests and is a forum sponsored by the Securities Industry and Financial Markets Association (SIFMA), New York. ASF's membership includes securities issuers, investors, financial intermediaries, rating agencies, legal and accounting firms, trustees, servicers, guarantors and other market participants.

Tom Deutsch, deputy director of ASF and a securities attorney, sees Project Restart as "a necessary but insufficient mechanism" to restart the secondary market.

"Two big issues need to be addressed from an economic standpoint prior to the effectiveness of Project Restart getting the secondary market going," he explains. One is the stabilization of home prices and the other is absorbing the excess supply of mortgage securities dumped on the market by overleveraged mortgage securities investors who have fled the market.

First, Deutsch does not see home prices stabilizing any time soon. "While they continue to decline - and to decline in some areas precipitously - that creates a lot of disincentive to lend money," he says. "Now we're seeing nationwide practically everybody has to put 20 percent down" to get a mortgage, he says, while "mortgage insurance is very difficult to obtain, even for the most creditworthy borrowers." Banks are reluctant to lend, Deutsch says, because a 20 percent down payment today could dissipate within a year or two as house prices continue to fall.

Deutsch sees further sharp house price declines of 20 percent or more. In some markets it could be worse. "I live in New York. I fully expect Manhattan home prices to drop anywhere from 25 percent to 45 percent over the next few years," he says.

"That's a huge amount of money that's at risk for banks if they are to lend," he adds. It means an 80 percent loan-to-value (LTV) mortgage today could be a 100 percent LTV or 130 percent LTV mortgage in two years. "Those are dangerous lending conditions and high-risk lending conditions," he adds. Without the GSE guarantees, "you obviously wouldn't see conforming loans being originated anywhere near the levels they are being originated now," Albertson adds.

On the second precondition for reviving the secondary market, the market still needs to absorb "massive amounts of RMBS and consumer ABS originations from 2005 and 2006," Albertson says. One of the chief reasons that these assets cannot be absorbed is that 70 percent of buyers of RMBS and ABS have left the market and are no longer buyers of securitized assets.

"Virtually all of those leveraged investment vehicles are now dissipated, whether they are SIVs [structured investment vehicles], collateralized debt obligation [CDO] collateral managers or hedge funds that are working off leverage," Deutsch explains. "Very few, if any, are still in the market to be able to hold those asset-backed and mortgage-backed securities."

The departure of most of those market players has led to a "massive disequilibrium between supply relative to demand, which ultimately leads to artificially low prices on these bonds." says Deutsch. And, he further notes, "If you have artificially low [prices for] outstanding bonds, it makes new issuance of new bonds impossible."

Mortgage lenders that operate under the private securitization model for originating new loans would have to sell them into the secondary market for a loss. "And generally, institutions are not in the business of losing money," Albertson says.

Even if and when the two big problems of excess housing supply and excess RMBS (and ABS) supply are resolved, it still does not mean that the private-label RMBS market could be restarted, according to Deutsch.

"Institutional investors have learned a great deal from the significant losses they have taken, particularly in subprime and alt-? MBS," says Deutsch. "There's been a lot of talk about skin in the game - institutional investors are the ones who really have skin in the game," he says. "So, they ultimately have to have confidence in buying securities to move forward into a new market."

The best way to restore trust, he says, is to dramatically improve transparency both on new issues and on current issues, and to set up a process whereby there can be continuous reporting that updates the status of loans backed by securities. In that way, transparency is maintained about changing underlying conditions, such as loan performance.

During the housing boom, many investors increased their purchase of subprime and alt-? RMBS without learning a lot about the characteristics of the underlying loans. "Many investors were caught up in the euphoria at the time, and investors either ignored data or failed to match data from one originator to the next," Deutsch says.

Project Restart seeks to address the discrepancies between one originator and another by establishing precise rules to describe key terms and data in a mortgage at the time of origination. Deutsch gives an example: "In 2006, the definition of full documentation for New Century [Financial Corporation] may have been very different from [the definition used by] a higher-quality lender like Wells Fargo [Home Mortgage]."

Project Restart's proposed RMBS disclosure package does not require that loans be full-documentation, for example, but they do require a precise definition of documentation. There are five levels of borrower income-verification documentation in one of the data fields for the initial reporting package in the Feb. 9 revision of the RMBS disclosure package, which was first launched in July 2008. The Feb. 9 version reflects comments and suggestions from the securitization community that reviewed the earlier proposed disclosure standards.

MBA's Courson responded to the original RMBS disclosure package in a letter to Deutsch last August. "MBA agrees that using the draft plan to collect and report loanlevel information will enhance transparency in the residential MBS market," Courson wrote. "However, MBA is concerned that the informational utility of certain elements of the draft plan may be overshadowed by the varied challenges of implementation."

Courson recommended that in some instances, "ASF reassess whether a modified approach would provide a comparable level of investor confidence, but in a manner that is less costly/burdensome."

In one example of how this might be done, Courson wrote about the underwriter-discretion field in the proposed disclosure package. "Any meaningful analysis using the underwriter-discretion field would not be possible because of the variations in underwriting criteria and exception thresholds in the industry," he stated in his letter to ASF.

"MBA requests ASF also consider whether collecting information on underwriting discretion may have a negative impact on the availability of affordable financing options," Courson wrote. "For example, if lenders adopt a 'no-discretion' policy because of the new data field, borrowers at the margin of qualifying would not be able to augment their background information, which would result in their being denied credit," he added.

The American Securitization Forum, in response to comments, has deleted underwriting as a data field. "Ultimately what we've decided is that it's very difficult to provide underwriting data in the disclosure package," says Deutsch. "Although we moved it out of [RMBS] disclosure, it will reappear in some other form," he adds.

Project Restart also has a proposed RMBS reporting package that can track material changes in the characteristics of a borrower, as well as loan performance. The ASF proposal comes with due-diligence standards to make sure the data are accurate and the data will also be reported to the Securities and Exchange Commission (SEC). By making standards for terms and data specific, the proposed RMBS disclosure package seeks to avoid the problems that created the market crash.

"In 2006, there wasn't a standard here. People could claim differing things [when using the same term, such as "full documentation"]. Ultimately, that creates a race to the bottom [in underwriting standards]," maintains Deutsch. The proposed disclosure standards of Project Restart change incentives for the better for lenders and securitizers, he contends.

By the end of April, the ASF is expected to approve a final version of the disclosure package and "hopefully" the reporting package, Deutsch says. By May, Wall Street issuers will know what they have to produce in terms of data and information, he says.

MBA President Courson sent further comments to ASF in a March 24 letter, commending ASF's efforts to "address systemic capital markets confidence issues." However, the letter stated that MBA objects to "the unilateral and exclusive way in which ASF has gone about developing proposed industry standards and communicated its intent to impose those standards on the mortgage industry."

Courson urged ASF to ensure there is sufficient representative samples of originators, servicers and other market participants taking part in all phases of Project Restart, including representations and warranties, repurchase procedures, due diligence, model servicing provisions, standard review committees and global coordination committees. He said that MBA "recommends that ASF actively solicit the feedback and involvement of industry segments that have not expressed their views," and offered help in facilitating input and interaction "from all segments of the housing finance system."

ASF expects to offer due-diligence procedures and representations and warranties for public comment sometime during the second quarter of 2009.

Meanwhile, the federal government and the Federal Reserve- through the Troubled Asset Relief Program (TARP) or TALF, or some other program - could be potential buyers of RMBS. Even Fannie Mae and Freddie Mac could be potential buyers of the new RMBS if and when they come to market.

"It's certainly a possibility," says FHFA's Lockhart. "It would depend very much on the framework that was done," he says, referring to the proposed disclosure standards from Project Restart. In the end, however, Lockhart thinks it is important for the private sector to step up to the plate and restart the private-label RMBS market. "If it's really going to be revived, it has to be done with private investors," he says.

Are there GSEs in the future?

Can we imagine the future without a government role? Without GSEs? Given the 60-year-plus history of government involvement in mortgage finance, it seems unlikely the future will not have an important role for the federal government.

Yet, there are voices for no government or GSE role.

"It's my view that although you may have needed Fannie and Freddie 20 or 30 years ago for prime mortgage securitization, you wouldn't need them today outside the panic," says Alex J. Pollock, resident fellow at the American Enterprise Institute, Washington, D.C.

"Most countries - many countries - have mortgage finance systems without GSEs," he says. "It would be good to look forward to a market where prime mortgages are securitized without GSEs," he says. ollock thinks the private-securitization market can function properly and meet the demand for housing finance if the system is properly set up. First, he would have the originator of the mortgage always retain a significant share of credit risk for the life of the mortgage, even - and perhaps especially - when it is placed into a pool for securitization.

Pollock points to the Mortgage Partnership Finance® (MPF) program as an example of having the originator keep a significant exposure to the loan. Under the MPF Program, which has been adopted by the Federal Home Loan Bank of Chicago and the Federal Home Loan Bank of Topeka (Kansas), among others, mortgage lenders continue to manage all aspects of their customer relationships rather than selling them to a secondary market agency.

Currently, however, these programs are facing funding challenges because the bonds that fund the mortgages do not have explicit government guarantees, notes Pollock so "it's hard to get long-term funding," he says. Nevertheless, the concept behind this program could be tied to securitization and could work, Pollock contends.

If there are GSEs in the future, then anyone in the mortgage business with significant credit risk as an owner of mortgages "should be practicing the old-fashioned banking idea of building up loan-loss reserves in good times," Pollock says. Unfortunately, during the recent boom, "no one was doing that," he says.

Indeed, the SEC "was going in the opposite direction in not wanting to let people do it," he says. The SEC considered the loan-loss reserves in good times as a technique to manage earnings. "It's not earnings management, it's reality - because bad loans are made in good times," says Pollock. "By the time you know they're bad, it's too late," he says.

A framework for the long term

The efforts of MBA's Council on Ensuring Mortgage Liquidity give some guidance on how a framework for the GSEs might be restructured in the future. For starters, the white paper released by the council in January, as noted earlier, provides useful information to advance the discussion about the future of the secondary market. The paper spells out key considerations for restoring the secondary market, from risk assessment to ensuring capital adequacy to controlling fraud. The white paper also provides descriptions of the characteristics of nine secondary market finance models that policy makers will want to consider as they construct a mortgage finance system for the future - from a fully privatized model to a system of covered bonds, the open-charter model, the improved current GSE model, the utility model and an FHA/Ginnie Mae-type model.

The summit, white paper and ongoing efforts of the council are aimed at fulfilling two missions, according to Berman. "The first mission is to help create a baseline of knowledge among the folks on the Hill," he says. "So it was important that MBA take the leadership role ... so that when we start to discuss issues, there will be a common jargon and common understanding of what the issues are," he says.

The idea was to address the fact that there are many in the administration and in Congress who do not have a background in mortgage securities and the secondary market arena, he explains. "So, creating the building blocks, the underlying foundation, if you will, that the debate can then be articulated [from] was our first step," he adds. The feedback from the white paper's outreach efforts to educate people on Capitol Hill and within the Obama administration has been "very, very positive," Berman says.

"The second goal is then to help actually shape the debate and create our advocacy position with respect to secondary market and to, obviously, promote and ensure liquidity and address the future of the GSEs, Fannie Mae and Freddie Mac," Berman says. The first step was "to adopt a series of what we call guiding principles," he explains. Those principles were first approved by MBA's Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG) and the Residential/Single-Family Board of Governors (RESBOG) and, finally, by MBA's board of directors.

MBA's guiding principles "will be the filters by which we will analyze and evaluate the various models of how secondary market liquidity can be established and how Fannie Mae and Freddie Mac should be reformulated in the future," Berman says.

While the text of MBA's guiding principles remains an internal document, Berman said he could "talk about some of the concepts we articulated that are key to understanding the positions."

It was important to the council and to MBA to spell out that the goal was to establish a secondary market driven by private investment, Berman says. "Much of our focus addressed the issue of how do we get the private investors back into the secondary market" for the long term without disturbing the "very, very fragile" secondary market that is operating today, he says. While MBA recognized that "there are primary market corrections that need to take place," Berman says, that was not the focus of the council's efforts.

The council identified transparency as the key to "reigniting investor demand." Transparency, he explains, is needed at all levels - from loan-level information to bond-structuring information, to risk assessments by the rating agencies and bond underwriters.

Transparency is needed not only at the time of origination of the loan and issuance of the mortgage-backed securities, but there also needs to be a flow of information throughout the life of the securitized instruments.

There should be an alignment of interests among issuers of securities and investors and various parties throughout the chain of secondary market participants, and they all should have some "skin in the game," says Berman. In addition, he adds, various participants in the chain need to be adequately capitalized.

Another goal for any future design for the secondary market is that it needs to attract not only the largest of sophisticated investors, but also "smaller institutional investors - not only within the U.S., but globally," says Berman. This means "an independent risk-assignment body needs to be re-established to bring in those secondand third-tier institutional investors, in terms of size, into the market to re-create a robust secondary market," Berman says.

In terms of regulation, the guiding principles include the idea that there should be a strong regulatory scheme and that various regulatory bodies need to be well coordinated. "Regulators also need to have sufficient resources and expertise to keep pace with an ever-changing secondary market and environment," Berman says.

The government should also provide a credit-guarantee program for the residential secondary mortgage market, as well as a liquidity backstop in times of financial crisis. "As we have become fond of saying, we need to plan on a liquidity backstop for the 100-year flood, which seems to occur every eight to 10 years," Berman says.

The guiding principles also identify the need to address accounting issues- such as mark-to-market rules and true sale and consolidation rules - that some say have unduly intensified the financial meltdown. If those two accounting issues "are not properly addressed, we think those will be obstacles to ensuring liquidity in the secondary mortgage market," says Berman.

Another concept behind the guiding principles addresses one of the practices that got the GSEs into trouble - namely holding large portfolios of mortgage-backed securities. "We don't have a specific proposal at this point in time, but we do have a principle, if you will, that the GSEs or whatever GSE-like entity comes out of Capitol Hill should be focused on the securitization function," says Berman. "And while there would be limited purposes [for] maintaining a portfolio, that would not be the main focus or drivers of their activity."

Berman expects that issues of containing and addressing systemic risk will dominate the legislative agenda in the coming months, and that any proposals to address the mortgage market will surface after Congress deals with the broader systemic issues.

Expect change

One central lesson learned from the current turmoil is that the GSEs should not go back to being what they were, according to the Harvard Joint Center for Housing Studies' Retsinas. "I do not believe one of the options is turning the clock back and re-creating these entities in the form they were before, even though that form and structure added value over several decades," he says.

One option to consider is to have no GSEs at all, although probably few- if any - will make this suggestion, says Retsinas.

On the other hand, he believes the current crisis in housing finance demonstrates that "the government role as a backstop to a viable market is necessary and appropriate."

Indeed, the government is just about the only functioning player in the market currently.

What the government should not do is saddle future GSEs or government agencies with unrealistic mandates that work to destabilize them over time. For example, Retsinas believes the Department of Housing and Urban Development (HUD) made a fundamental mistake about a decade ago when it decided to classify the purchase of subprime mortgage-backed assets by the GSEs as counting toward their "goal credit" in reaching ever-higher affordable-lending goals as a share of overall business, he says.

Buying subprime was profitable at the time. Yet, the combination of unsound mandates and riskier markets proved financially harmful, leading to the accumulation of assets that, while temporarily making the GSEs look profitable, were, in the long term, setting them up for their demise.

Retsinas, like virtually everyone else, also points to greater transparency as key to the revival and long-term survival of mortgage finance. However, he points out, "In the current environment that we are in, transparency alone is not going to restore investor confidence in the mortgage market . . . and while it is necessary and appropriate and will help, I don't know that it is the magic wand."

The goal of reviving the secondary market, whether in the short term or long term, is now captive to the larger issue of systemic risk. "Systemic risk is paramount. It has to be addressed," says Retsinas.

"It's hard to imagine how you make any progress on any part of financial services unless you deal with the issue of systemic risk," he says. "As you look, for example, at the regulatory architecture for housing finance, it has to be a bridge to the larger issue of the regulation of the financial services industry."

END