NEW YORK, March 13 (IFR) - The Senate Banking Committee's
agreement on winding down Fannie Mae and Freddie Mac, the
country's biggest mortgage financiers, brings the US
government's plan to end its dominance of the housing finance
market a step closer to reality.
And that could finally take the brakes off the RMBS market
as private institutions assume the role of the two agencies,
which currently own or guarantee some 60% of US home loans.
Committee Chairman Tim Johnson and Senator Mike Crapo on
Tuesday outlined the proposal to shut them down after months of
talks that included soliciting input from the Obama
They intend to introduce draft legislation soon, and while
passage by the full Senate (or House) is not assured, there is
wide agreement the US housing finance system needs an overhaul.
Under the new proposal, private interests would absorb the
first 10% of any mortgage losses before an industry-financed
backstop would kick in.
And that is unlikely to put off investors who have already
welcomed risk-sharing securitization deals from Fannie and
Freddie with a 3% private risk threshold - deals that were
multiple times oversubscribed.
"Freddie's STACR and Fannie's CAS programs were a precursor
to what we are hearing about now, where the government acts as a
catastrophic insurer and the market bears the brunt of the 3%
credit loss," one securitization banker told IFR.
"Whether it's 7% or 10%, that's for the regulators to
decide. But as far as selling credit risk goes, there is plenty
Indeed those deals, along with REO-to-rental trades from the
likes of Blackstone, have been embraced by investors keen for
supply, which has been thin since the financial crisis.
Non-agency RMBS was just under USD20bn last year - a far cry
from the USD1tn at the market's 2006 peak - and both mutual and
pension funds are now flooded with cash to spend.
Moreover, clarity from the Consumer Finance Protection
Bureau in January about what loans qualify under its guidelines
removed a big barrier.
The new scheme would see formation of a Federal Mortgage
Insurance Corp (FMIC) to replace Fannie and Freddie, which were
taken over by the government in 2008 in the midst of the
subprime mortgage meltdown.
FMIC would be funded by user fees and, most crucially, would
guarantee 90% of mortgage credit risk.
John Sim, a mortgage-bond strategist at JP Morgan, was more
cautious about whether the private market has the depth to
handle the additional supply - or the additional risk.
"The new system will be selling off the bottom 10% of the
risk, whereas the current system merely guarantees it with a
nominal fee," he said.
If the private market fails to adequately absorb all the new
RMBS product, then spreads could widen - and in turn that could
mean higher rates for retail home mortgages.
Even without that, rates could rise because the 10%
private-label piece may have to offer the kinds of richer yields
available in the STACR and CAS products, said Mitch Flack,
co-head of the securitized unit at asset manager TCW.
"The proposed 10% first-loss taken by private investors is a
good step," Flack said.
"The question is: will this actually reduce the credit box
for mortgage lending and the market's overall ability to reach
the volumes of mortgage lending that we've seen in the past?"
But private capital is already playing a role in the jumbo
market for mortgages in excess of USD417,000 on a single-family
home, or USD625,000 in high cost areas such as New York or
And that will naturally expand if plans to shrink those
conforming loan limits by 5% each year for five years - as
outlined in the new bill - were put in place, the banker said.
He also reckons some players, including REITs and specialty
finance companies are already maneuvering to take up the slack
on smaller mortgages, while banks such as Chase and Everbank
would probably remain more focused on the jumbo issues.
Even so, it's a massive revamp and regulators will be extra
careful in managing it.
The current infrastructure for US residential mortgages -
from mechanisms for pre-approved origination to guarantees and
pool servicing - has been in place for decades.
"This has been designed so that a transition from Freddie
and Fannie is seamless," said Brian Ye, a managing director in
the mortgage strategy team at JP Morgan.
"The current system of issuing loans via Fannie and Freddie
works well, as there is a deep liquid MBS market. The Fed even
buys these securities - so the last thing it wants to do is to
disturb any of that."
And others insist that, as long as there is a guarantee
ultimately underpinning the mortgages, it doesn't matter which
entity provides it.
As one banker put it: "It's just an acronym."