BofA analysts claim GSE reform 'politically infeasible'
Bank of America Merrill Lynch analysts said Fannie Mae and Freddie Mac reform may not be as imminent as many think and could prove to be "politically infeasible." BofAML hosted a conference call Monday on the state of housing finance in the nation. In slides provided to HousingWire, housing researcher Chris Flanagan describes the mortgage origination outlook for 2011 as "bleak," with prices expected to drop another 3% and volumes down 30%. In short, this year will likely offer no large changes to the mortgage markets compared to last year, and the GSEs dominance may continue to increase. In February, the Treasury Department released its white paper on the future of housing finance, providing Congress three options for winding down Fannie Mae and Freddie Mac. The thinking is for the government to reduce its role in the mortgage market and allow private capital to take back market dominance. In 2010, the government, either through the GSEs or the Federal Housing Administration, fund 94% of all mortgages in the United States, a record high. That share has increased from as low as 43% in 2005, according to the BofAML presentation to investors. Since the Treasury released its white paper, lawmakers have vowed to work quickly on reform. Rep. Barney Frank (D-Mass.) told Bloomberg Television in a recent interview that a deal could be reached in Congress by the end of the year. But banking analysts predict a longer wait. Even the Treasury said in the paper that the process will take between three to five years once Congress makes its decision. And the private market has shown very few signs of life to replace the GSEs. There have been two private-label mortgage-backed securities deals sold since the crisis, both by Redwood Trust (RWT). According to BofAML analysts, private origination volume is at its lowest level in the past 20 years, and as the market waits for reform, products and options for borrowers could vanish. "(The) 30-year mortgage, refinanceability, and effective non-recourse nature of mortgages (are) very unlikely to go away," according to the BofAML presentation. As home prices could deteriorate another 3% in 2011 and foreclosures remain elevated, the analysts said government investor financing programs are still needed. And there is plenty of capital to do that. Capital at the GSEs will be unlimited thanks to taxpayers until at least 2012, analysts said, and could even have another $275 billion available after then. Instead of rushing to reform, analysts said there are more fundamental problems with U.S. housing policy and lawmakers have harder questions to answer than what to do with Fannie and Freddie. "Spreading the wealth through homeownership is not really working," analysts said. "Is housing finance reform asking the right question? No." Write to Jon Prior. Follow him on Twitter: @JonAPrior