An explicit government guarantee and insurance wrap on mortgage-backed securities are among a gathering consensus about Fannie Mae/Freddie Mac reform that is emerging in one of the two main political camps debating the issue.
This is part of the consensus of parties that includes industry groups and a progressive think tank with ties to the Obama administration, Ann Schnare, president of consultancy A.B. Schnare Associates, told attendees during a Securities Industry and Financial Markets Association panel discussion on government-sponsored enterprise reform in New York.
She said GSE reform backed by this political camp could also involve an insurance pool that would absorb some of taxpayers' losses. It would be financed through risk-based fees paid to the insurance fund and consist of multiple conduits that are privately capitalized.
However she noted that within this political camp there also are still several differences on how to handle issues like affordable housing obligations and the portfolio.
There is some consensus that portfolio in its current form is being increasingly considered something that does not work because it is "way too leveraged," said panelist Jay Diamond, a managing director at Annaly Capital Management who considers himself among "fans of the wrap."
Panelist Mahesh Swaminathan, head of mortgage-backed securities research at Credit Suisse, said one policy option would be to use the portfolio as a means of stabilizing mortgage rates at times of mortgage disruption as it has in some past years during the late 1990s and early 2000s. Swaminathan believes other private investors could not play this role because their incentives would not be aligned with public need and Fannie and Freddie are better suited for this than the Federal Reserve.
Even if consensus could be reached in the camp of those who still want Fannie Mae and Freddie Mac to play a key public-purpose role such as this one, the other political camp of conservatives, Republicans and academics is still moving in another direction and could gain ground in upcoming elections. They are pushing for privatization of Fannie and Freddie, although perhaps not for the Federal Housing Administration. They also may not be committed to the 30-year mortgage that is standard in the United States, but not necessarily elsewhere, Schnare noted. This camp also acknowledges the government guarantee issue has to be and would be considered carefully in reform.
Panelists from both camps seemed confident given the huge existing U.S. and international stakes in Fannie Mae/Freddie Mac securities today that there would be no threat to their "explicit/implicit" guarantee in reform, no matter how it was handled.
When asked during a question and answer session whether foreign investors in China who have holdings in Fannie Mae and Freddie Mac securities should be concerned, panelist and consultant Bert Ely of Ely & Co.—who argues that there could be some appeal to reprivatizing mortgage credit and moving toward a reduced role for government involvement in managing mortgage credit risk—said, "Don't worry about it. The [U.S.] government is standing behind [Fannie Mae/Freddie Mac debt securities]."
The United States is "in the same boat" as foreign investors agency securities market given that the Federal Reserve has so many Fannie Mae and Freddie Mac MBS on its balance sheet, Diamond noted.
But while there was talk about confidence when it comes to the Fannie Mae/Freddie Mac guarantee, there is still a sense of uncertainty and need for more direction from the government when it comes to the GSEs' future. Chris Killian, vice president in SIFMA's securitization group said that, as the group gears up to respond to the Treasury's request for comment on Fannie/Freddie reform, it and others continue to call for more specifics to respond to. "Policymakers need to know what they want," he said.
The fate of the securitized private label and government-sponsored enterprise markets are intertwined, Killian noted, adding that there some positives in the latter market that could be worth preserving in reform, such as the 30-year mortgage and its interrelated liquidity and homogenous nature.
Covered bonds, a form of mortgage-related security used commonly in Europe and elsewhere, continues to be one of the alternatives to securitization but should be dealt with separately, outside of GSE reform, Ely said. These are conducive to the simpler originate-and-hold model in other global markets in contrast to the originate-and-sell model used in tandem with the GSEs.
