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GSE reform unlikely until 2014

Pressing concerns delay Congressional housing plans

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As the House of Representatives outlined its agenda for floor hearings over the next two months, the market discovered that housing finance reform was not included on policymakers’ to-do list.

This means the House will not consider a government-sponsored enterprise bill by year-end, showing the challenges officials still face in reforming the sustainability of the mortgage finance system.

"Not surprisingly, Syria, the budget, and the debt ceiling are the dominant issues," explained Keefe Bruyette & Woods analysts Brian Gardner and Michael Michaud.

They added, "In our view, the crowded calendar made it difficult to schedule a debate of the PATH Act, which passed the House Financial Services Committee in July."

The lack of attention to housing finance reform by Congress reinforces the belief that the Protecting American Taxpayers and Homeowners Act faces a steep climb to floor consideration and any sort of mortgage finance reform efforts will take a backseat for the remainder of the year.

"With Congress returning on Sept. 9, there will be a considerable amount of mortgage finance reform chatter on Capitol Hill this fall but we do not believe there will be meaningful movement on these efforts in either chamber," said Compass Point policy analyst Isaac Boltansky.

He added, "We expect the housing industry to feverishly oppose the [PATH Act] as it would significantly reduce the government’s role in the mortgage market. We doubt that the PATH Act will even make it to the House floor this year and, in the outside chance it does clear the House, the bill would not gain traction in the Senate."

While investors are desperately searching for some type of reform to Fannie Mae and Freddie Mac, there are other areas of housing finance that need to be fixed first to reach a more rational mortgage market.

A complete wind down of the enterprises seems to be counterproductive until more headway is made in reducing the overall financial system risk to volatile home prices and mortgage credit risk, stated NewOak CEO and co-founder Ron D’Vari.

"A more transparent and self-disciplined mortgage credit market is even more critical and urgent to the future of housing markets than winding down the GSEs," D’Vari noted.

He continued, "All things the same, the wind down of GSEs would first naturally lead to the transfer of the housing systematic risk to the banking system."

The ideal goal would be for the mortgage market to adopt a wider range of private money investors that could gradually learn ways to invest in mortgage credit markets.

However, this would require more effective risk management and underwriting tools, which are both critical issues currently weighing on market stability.

The flurry of activity during the past few months surrounding mortgage finance reform has lifted the spirits of many industry experts, but they remain skeptical that Congress will finish a bill before the end of 2014, according to KBW.

"We think the absence of a GSE bill from this fall’s House agenda suggests how heavy a lift a GSE bill is," KBW analysts said.

They concluded, "This turn of events should remind investors that, in our view, the most likely course of action over the next two years is for status quo where Congress leaves the GSEs in their current state and FHFA, the GSE regulators, diving any policy changes such as reducing loan limits and increasing guarantee fees to attract private capital back into the mortgage market."

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