Debt ceiling solution could hasten g-fee rise
The looming debt ceiling could quicken the increase in guarantee fees as the government looks for additional revenue, analysts predict.
While the upcoming debt ceiling negotiations pose a more immediate risk to mortgages — exhausting the Treasury's "extraordinary actions" to avoid hitting the debt ceiling are likely to halt in March — the g-fee increase could be accelerated as a means to fill budget holes, JPMorgan Chase (JPM) said in its 2013 securitized weekly outlook.
G-fees are projected to increase by at least 25 basis points in 2013 as a way to help bring private capital into the mortgage market and reduce the government-sponsored enterprises market share of securitizations.
Click on the graph to view g-fee increases' potential impact on debt ceiling.
At the beginning of last year, Congress authorized 10 basis points in g-fee hikes for the next 10 years as a way to fund the temporary reduction in payroll tactics.
"Arguably, this is a tactic that appeals to both parties: it helps shrink the footprint of the GSEs, while raising revenues," the report said.
For example, a one-time 10 basis point increase in g-fees could generate nearly $30 billion in additional revenue over the next 10 years.
Therefore, while mortgages are likely to underperform as debt ceiling angst rises, the asset class could "ultimately benefit from lower callability if g-fees are raised as part of the deal."
The next round of g-fee hikes is expected to differentiate more on borrower credit — loan-to-value ratio or FICO score — helping ensure that GSE securitizations do not become overly concentrated in high LTV, lower credit score loans and particularly if banks retain better credit quality loans.
While the timing of g-free increases is uncertain, current acting director Ed DeMarco of the Federal Housing Finance Agency has described the pace as being "gradual."
"Consequently, we could envision a 10bp increase in March (to coincide with debt ceiling discussions), as well as perhaps another in the third quarter, but it's very difficult to pinpoint the timing," the report said.
Last month, Bank of America Merrill Lynch (BAC) posted a similar forecast for g-free increases in 2013, with a bigger prediction that g-fees are expected to rise by at least an additional 30 to 50 basis points to match recent private label execution.
Currently, BofAML maintains an overweight recommendation for mortgage-backed securitization despite the hawkish tone of the Federal Open Market Committee minutes, according to its securitized report.
Thus, rates are biased lower heading into the February/March timeframe for the debt ceiling discussions.
"Benefiting from this volatility are opportunistic investors who will leg in on weakness and provide technical depth to the market. Lower dollar prices and higher yields have lured in the banks, agency real estate investment trust properties," BofAML said.
In comparison, the Societe Generale Cross Asset Research suggested that while the debt-ceiling negations are likely to provide uncertainty, the markets will be more resilient than anticipated.
"We believe that volatility related to this issue will be relatively muted and should be viewed as an opportunity to add risk assets - given our view that another 'last-minute deal' will be reached," the credit strategy report stated.