March 6, 2013

Fannie-Freddie Reform Happening Right Under Our Noses

March 6, 2013

Fannie-Freddie Reform Happening Right Under Our Noses

Wake Up To GSE Reform - image (c) HousingWire

Last week, I posted the consumer explanation of why the jumbo mortgage market is so hot after spending time with some of the big MBS players on Wall Street. Today, I wanted to share a more technical version from my friend Adam Quinones of the Thomson Reuters Tradeweb MBS team, who was talking to some of the same folks this week…

I just attended BAML’s securitization conference. A few highlights…

– GSE reform is happening right under our noses. FHFA announced plans to spin-off duplicate Enterprise operations into one new company. This decision was broadcast in previous white papers and strategic objectives. Consider DeMarco’s money put where his mouth is…

– Initially the firm will be funded by Fannie and Freddie. A public/private ownership structure will emerge over time as a new housing finance system develops. My early bet is on Ted Tozer to run it.

– Risk Transfer Program” aka federally mandated legacy MBS sales are coming. Fannie and Freddie will start selling legacy mortgage securities (now nonagency) this year. FHFA put a $30bn target for each. GSE folks felt that number was big but said they’d do their best. Lots of questions around this program. Not many answers offered yet. Credit risk is coming off the tax-payer balance sheet. This is price discovery.

– Leveling the playing field for private$. G-Fees will continue to rise and seller specific disparity will decline (note rate adjusters still in place). Two weeks ago our anecdotal estimates pegged hikes at an additional 15-20bps in 2013. Leaving agency credit costs near 70bps strip. This forecast was substantiated today.

– More leveling the playing field: Less Gfee disparity between the two agencies. Strategically speaking, Fannie and Freddie coupons swaps should start to level out if this is true. Long run play here.

– HARP to be extended? JPM Chase’s Garry Cipponeri wants to see it end in 2015 (higher rates kill the program too). Regs really can’t get any looser though. Major hurdle is cross servicer implementation. No chance on a non-agency version.

– GNMA is hiring to bring their infrastructure into the 21st century (they skipped the 20th). Expect them to announce a new investor inquiry desk this year.

– Yes non-agency lending is ramping up. Don’t get too excited though. 100% growth doesn’t mean much when you go from 1-2 out of 100. Ratings agencies still represent a major roadblock to nonagency issuance.

– TBA MBS are going nowhere…

These are just my comments re: Secondary Market Reform. So much more was discussed. The BAML research team did a great job (thx Chris!). I did find it funny that the conference opened with input from an EQUITY ANALYST who said the “great rotation” from bonds to stocks is officially on…

We expect to play a leadership role in the new secondary mortgage market. For us that mission got underway when we started building a community of mortgage bankers around the Tradeweb TBA MBS platform. That community is expanding quickly inside of Eikon. We have big plans. What comes next sets the stage for the future of US housing finance. Get on board. The train is moving…

Also my friend and contributor to TheBasisPoint Rob Chrisman had some important comments on the topic of Fannie-Freddie reform yesterday:

The goals [of the Fannie-Freddie reform announcement] are consistent with the FHFA Strategic Plan last year which is focused on reducing the role of the GSEs and building for the future housing market. The main goals for the GSEs in 2013 are:

(1) target at least $30 billion of risk-sharing transactions;

(2) contract the multifamily business by 10%; and

(3) sell at least 5% of the less-liquid parts of their retained portfolios, primarily delinquent loans. While not an explicit scorecard item, GSE guarantee fees are expected to increase further.

Finally the GSEs have started the process of combining part of the infrastructure of the two companies.

What does this news mean to us common folks?

It was expected that the FHFA would put forth a plan for securitization that would provide a mechanism for ALL loans – not just conventional conforming, but also FHA, VA, and jumbo. Okay, so this is simultaneously big stuff and not big stuff – and why wait or rely on Congress to put forth a plan? A couple phrases to note:

“The overarching goal is to create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future,” and,

“He said the new joint venture is not expected to begin securitizing loans next year.”

Everyone in the industry has noted that F&F are running themselves, or the FHFA is running them, more as private companies that need to make money, just like everyone else. So don’t look for any changes for quite some time – giving the important securities markets some time to digest and ruminate on this. So we can view this as pretty positive news.

FHFA Outlines 2013 Goals For Fannie Mae & Freddie Mac (FHFA)

Fannie-Freddie To Hand Securitization Business To New Firm (Reuters)

Why The Jumbo Mortgage Market Is So Hot (TheBasisPoint)

Adam Quinones on twitter: @AQ_MND

Rob Chrisman daily commentary


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