WE’RE HEARING…the Obama administration thinks you can have your MBS cake and eat it, too, but some on Wall Street are not so sure.

It comes down to, what’s more important? Giving underwater agency borrowers more of a break through principal forgiveness, or keeping the agency mortgage-backed securities market profitable and running smoothly?

I say don’t mess with the securitized agency mortgage market unless you really know what you’re doing or housing finance doesn’t rely so heavily on it.

If rumors we’re hearing pan out about Federal Housing Finance Agency acting director Ed DeMarco leaving (he’s a well-known opponent of agency forgiveness) and a new Obama-appointed FHFA director coming in and changing the agency’s direction on this issue next year, it will present a potential risk to the MBS market, Credit Suisse warns.

As Annaly Capital Management managing director Jay Diamond noted at a recent SIFMA meeting, while the securitized commercial mortgage market has made a comeback, the private securitized single-family mortgage market still hasn’t.

So talk all you want about how Fannie Mae and Freddie Mac may be on the way out someday. As Diamond said, if Fannie and Freddie weren’t around today, we’d be trying to create them!

I’m not saying principal reduction should be dismissed out of hand. Data show it has been very effective when carefully and selectively applied. But the problem is it’s probably going to be tough to apply selectively in this case.

A key problem lies in which underwater agency borrowers get it and which do not, and whether there is “moral hazard” in what the borrowers who don’t get it do.

Note that this is not the only way for agency borrowers to get principal reduction. It is available via “hardest-hit” funds in certain states, and in the private market there also are “rewards” available selectively for borrowers who pay on time that mitigate the moral hazard risk.

Also consider the fiscal cliff, how much an agency principal reduction program might cost, and whether the signs of a housing rebound will be sustained.

Put those together and tell me if it all adds up to a negative or a positive for the MBS market and the U.S. economy, and I’ll tell you whether agency principal forgiveness is worth it!

WHAT WE’RE GOING TO BE HEARING…We’ve assembled the most talented writers in the mortgage business to write this column and keep us abreast of what they are hearing from the most knowledgeable sources. BONNIE SINNOCK will cover the securities markets, TED CORNWELL technology and servicing, MARK FOGARTY and BRIAN COLLINS the DC and national markets, and there will be room for pieces from origination sources and other SourceMedia writers as well. Click on our lead blog every day to check out what we’re hearing!