JPMorgan sees some higher costs of borrowing from GSE reform
The Obama administration's recommendations to reform Fannie Mae and Freddie Mac will probably increase costs of borrowing in the short term, especially for bonds insured by Ginnie Mae according to JPMorgan Chase analysts. On a conference call discussing Friday's long-awaited white paper from the Treasury Department, JPMorgan's Matthew Jozoff and Brian Ye said the government's options could lead to limited issuance of mortgage-backed securities, as the GSEs are wound down over the next handful of years. But the analysts said there is still support for agency MBS from a credit perspective and the options are a positive for the mortgage basis overall. Therefore, Jozoff and Ye said they return to a maintaining a positive outlook for the mortgage basis because of what they see in government's recommendations and attractive valuations in the space. Jozoff said any possible successor to the GSEs "could exist and be reasonably profitable", if they "stick to their knitting" of strong underwriting standards based on borrowers with higher FICO scores while guaranteeing loan-to-value ratios. But, he warned the process of reforming the companies that have a hand in about 95% of all American mortgages is going to take time. "If we're going to move to a more private market, we have to encourage private securitization," which now accounts for about 5% of the market, he said. "When the government pulls back from the mortgage market, there needs to be something to fill the gap…and right now the private sector is nowhere near ready to swallow $600 billion to $1 trillion of government mortgages." The JPMorgan analysts also stressed the important of the TBA market, saying it'd be "very advantageous" to keep this market in place to attract capital and provide liquidity to mortgage-backed securities. Without the liquidity benchmark provided by the TBA market, the interest rates for conforming mortgages would rise, hurting originations as fewer homeowner chose to refinance their loan, the analysts said. The government's options include a proposal to increase the cost of the government guarantee for Federal Housing Administration borrowers by 25 basis points annually. "Remember that these costs were recently raised 50 basis points to between 85 and 90 bps, so on top of the bank rate, borrower's will be paying 1.1% to 1.5% additional insurance costs on an annualized basis," Ye said. Still, Ye felt the recommendations were "very very concrete steps and a positive overall for Ginnie Mae MBS" valuations, as higher premiums and lower loan size further reduce convexity and lower supply provides strong technical support for Ginnie assets. Write to Jason Philyaw.