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JPMorgan analysts see GSE reform years away, losses to continue through 2015

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While reform of the government-sponsored enterprises could gain clarity in 2011, any action from Congress will likely take years and would require significant structural changes to return the companies to private status, according to JPMorgan analysts. So far, Fannie Mae and Freddie Mac have drawn $148 billion from the Treasury Department. The Federal Housing Finance Agency, which has held the companies in conservatorship since 2008, projected both could end up drawing between $221 billion in a best-case scenario through 2013. The JPMorgan Chase analysts see it at $225 billion. At a 10% dividend, JPMorgan analysts said, Fannie and Freddie will be paying $15 billion a year in dividend payments alone. The analysts expect total guarantee losses at the two firms to reach roughly $180 billion with most of it being realized through 2015. Add Ginnie Mae to the mix, and losses from GSE-related guarantees could approach $300 billion. "This massive capital borrowing at a 10% cost of capital (dividend to Treasury) practically ensures that the GSEs won’t exit conservatorship on their own," according to the report. One solution the analysts lay out is to divide the two companies into a "good" bank and a "bad" bank with the former guaranteeing reasonable loans for qualifying borrowers unencumbered from the "bad" one, similar to how regulators tried to structure Lehman Brothers as it spiraled toward bankruptcy. Regardless of the outcome, analysts reiterated the importance of the GSEs' role in the housing sector. Over 95% of mortgage originations are currently guaranteed by the U.S. government, compared to 35% in 2006. "In the end, we expect that the public discussion around the future of the GSEs will take years to be fully resolved," according to the report. Write to Jon Prior.

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