The recent Conference on the Future of Housing Finance
last week at the Treasury Department
concluded with some consensus on the futures of government sponsored entities Fannie Mae
and Freddie Mac
. In a research note today Deutsche Bank
analyst Steven Abrahams summarized the coming form of "GSE 2.0."
Key elements included re-launching of the MBS guarantee business backed by catastrophe insurance from the US government. This guarantee would implicitly serve as a backstop to the TBA pass-through market. In a panel with investors in the space, both of these aspects were considered key to maintaining adequate liquidity at the GSEs.
Large scale investors, such as Ranieri & Co
and PIMCO are both vocal in supporting the government guarantee, with PIMCO managing director Bill Gross saying yesterday that he feels such a guarantee is undesirable, yet neccessary
. "Markets and private incentives without proper guardrails were as threatening to a sound economy in the 21st century as too much regulation and government ownership proved to be in the 1970s," he said.
Furthermore, in the future the GSEs will likely get out of the portfolio investment business, except for limited warehousing of residential and multi-family loans before securitization. Abrahams also sees the GSEs becoming co-ops, "capitalized by the very originators that need securitization," he wrote in an outlook report today.
However, there are questions of costs of the government getting into the MBS guarantee business. Further, while the government, regulators and the market at-large agree that this will lower the cost of arranging and securitizing mortgages, these solutions leave the taxpayer ultimately on the hook for losses.
"One nuance of the guarantee discussion touches on whether the catastrophe insurance should apply to the new GSEs or to separate blocks or issue years of MBS — to the entities or the assets. Opinion for now leans toward insuring the assets," wrote Abrahams.
"That would require the GSEs to operate like insurance companies with segregated books of business, separately capitalized and serviced," he adds. "If losses exhausted the capital supporting a particular book, government insurance would kick in. That would allow the GSE to continue writing new business without concerns about insolvency."
Write to Jacob Gaffney