GSE reform to take years, guaranteed
The future reform of government-sponsored enterprises Fannie Mae and Freddie Mac will take years to implement and will carry an explicit government guarantee, mortgage finance analysts are predicting. The U.S. Treasury's white paper concerning reform of the GSEs is due out first thing Friday. It is largely believed that the Treasury will recommend a gradual winding down of its position with the firms and away from a controlling stake. With speculation abounding over what forms the recommendations may ultimately take, mortgage finance analysts are predicting resolution will take place over a very long timeline. This serves a dual purpose, they say, of allowing investors to unwind their positions without disrupting the mortgage market at-large. By removing urgency from the process, it is expected that the Treasury will make it appear that immediate action is not imperative. "We expect a long road to implementation, which will allow markets to transition to the new housing finance system and avoid a negative shock to the housing market," reads a mortgage strategy report from one of the top four banks Thursday. "This means that we should expect only short-lived volatility in the mortgage-backed securities markets as announcements related to GSE reform are made." The note adds a window of 10 to 15 years of transition, with the creation of a Federal Deposit Insurance Corp.-like insurance fund and new private entities to guarantee the new government-backed MBS. A note from Credit Suisse supports that claim. "We are optimistic about a catastrophic backstop model reportedly being considered, which has the potential to share elements with our proposal," said analysts Mukul Chhabra, Qumber Hassan, and Mahesh Swaminathan. "We believe that Treasury's support for a specific plan is important to avoid investor disappointment." They add that any perception that the government is leaning toward a private mortgage model would trigger significant spread widening. "On the other hand an explicit backstop model should be viewed favorably by investors, in our view," they add. Jim Vogel of FTN Financial, takes pause with calling the reform a "winding down" as the timeline is so extended that it isn't a correct way to characterize the plan. "The goal of the GSE reform white paper is not to offer a reform plan," Vogel said. "It’s to establish a political position on housing finance that can eventually lead to a reform plan." In the meantime, Vogel indicates that the "catastrophe fund" is the favored plan of investors and the mortgage industry. "Although it has the fewest government votes today, it’s the de facto compromise between the other two alternatives," he said. "The idea is to improve, but perpetuate the core of the existing system." Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.