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FHA loans could face "tidal wave of defaults"

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Investments

Proposed GSE reform called "fat target" for micro-management

Senate likely too busy to pass law anyway

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One day after the announcement of intended comprehensive reform of Fannie Mae and Freddie Mac — being drafted by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, — reaction from relevant trade groups are largely positive with some negative reviews.

However, the lack of detail in regard to the ensuing support of the To-Be-Announced secondary market appears to have investors wary.

According to point #4 of this handy summation of the expected legislation, discussion on the world's largest debt market outside U.S. Treasurys is hardly comprehensive.

In short, in early morning emails, many investors need more convincing in the ability of the Senate Banking Committee to institute housing reform that will not damage the TBA market. The TBA market for Fannie Mae and Freddie Mac bonds is highly liquid, and the second-largest bond market in the world.

"Housing finance policy was such a colossal failure last decade – and it affects so many people – it is a fat target for micro-managing. Who doesn’t think they can’t improve on past performance?" asks Jim Vogel of TFN Financial

"The mortgage industry wants some path to the future so it can reinvent itself after 5 years of cleanup," he added. "It doesn’t want each step on that path to be so defined that Washington effectively controls the business."

Outspoken housing reform critic Edward Pinto, a codirector of the American Enterprise Institute International Center on Housing Risk lobbed a heavily-worded criticism against the plan.

"The pro-cyclical Johnson-Crapo plan would increase the wrong kind of debt for our economy—debt that bids up existing housing assets and the price of the land they sit on, creating a temporary wealth effect and a crowding out of private capital investment that is much needed for a productive economy and increased job growth," he said.

However, what matters most specifically to investors, and Vogel admits the Senate Banking Committee put its fair share of research into its plan, is whether the new reform would be less restrictive on the TBA.

Of course, new regulations do not typically loosen things up. Rather the opposite.

"Meanwhile, the government also remains determined to shrink GSE presence with higher fees and reduced balance sheets," Vogel said. "To the extent renewed household leverage would boost consumption and GDP, it’s going to occur organically and not because it’s stimulated by government actions. 

 "Indeed, it’s smarter to expect more headwinds," he concludes.

Additionally, according to Brian Gardner, SVP of Washington Research at Keefe, Bruyette & Woods, there is little chance of such legislation even passing this year.

"In a shortened election year, the Senate calendar is already crowded with other legislation and pending nominations," Gardner said. "It will be difficult for the Senate leadership to find time to schedule for a bill as complex and politically sensitive as a GSE reform bill."

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