President Obama and the head of the Federal Housing Finance Agency, Ed DeMarco, are at odds strategically with widespread principal reductions.
The Government Accountability Office found principal reduction would help some struggling homeowners and criticized the FHFA for delaying a decision to involve Fannie Mae and Freddie Mac in the effort. DeMarco has long said a principal reduction program on GSE loans would cost taxpayers too much.
According to Deutsche Bank (DB), citing this conflict, Obama will likely try to replace DeMarco if victorious. Therefore, if Mitt Romney is successful, this threat is removed, at least for the short term.
Residential mortgage-backed securities analyst Steven Abrahams said "it's a difficult call, but MBS stands to tighten on a Romney win."
Abrahams said an Obama win would create many unknowns, especially in terms of who would be named as replacement and that individual's stance on principal forgiveness, something which can take many forms.
"None seem bullish for MBS," he adds.
Deutsche Bank does see the two potential administrations agreeing on many housing and mortgage topics.
Both will favor raising guarantee fees to price the government-sponsored enterprises out of the secondary markets, and sell Fannie Mae and Freddie Mac properties to private investors.. Both will also seek to bring the market share of the Federal Housing Administration, and see a larger conveyance of mortgage financing risk from the federal government to the private sector.