Mortgage bond investors in Fannie Mae and Freddie Mac securities fear the replacement of current acting director Ed DeMarco of the Federal Housing Finance Agency will devestate the secondary market, given the fact that he's held off principal reduction programs that likely would have accelerated prepayments.
That possible fear reared its head Wednesday as Wall Street felt the ground shake when reports from Rep. Elijah Cummings office noted that Congressman Mel Watt, D-N.C., is said to be President Barack Obama’s pick to lead the FHFA.
While neither Congressman Watt’s office or the FHFA commented on the alleged replacement, investors witnessed the secondary market react to the aftermath of the announcement.
Mortgage coupons of 4.5% and higher are off almost one-eight of a point versus Treasury and LIBOR hedges, said Jim Vogel, chartered financial analyst of FTN Financial, in an email to clients this morning.
Additionally, in April, agency debt outperformed the index of agency mortgage-backed securities.
"Among bullet agencies, the 5-7 year maturities produced the best risk-adjusted returns versus Treasuries," Vogel stated.
Furthermore, issues remain foggy for securities valuation, specifically the fact that if senators decide to turn Watt’s nomination into a housing debate, it could be slow going for a confirmation vote.
Similarly, Edward Mills of FBR Capital Markets anticipates concern that Watt may not meet statutory requirements for the director’s position.
"Senate Republicans (who have the votes to block a nomination) will be extremely reluctant to support a candidate who has publicly backed principal reductions, has supported bankruptcy changes allowing for 'cram-down' on residential mortgages, and served on the House Financial Services Committee during the height of power of Fannie and Freddie (having accepted campaign contributions from both)," FBR Capital explained.
Furthermore, if Watt’s nomination was unsuccessful, FBR Capital believes that any other emerging candidates would also face similarly long odds in the Senate.
While the White House wants to put its executive stamp on housing reforming as possible, it’s not clear the former push for principal forgiveness and accelerated refinancing relief would have the impact on the housing market it might have had when first proposed several years earlier.
"The housing recovery has picked up consistently since its beginning 12 months ago," Vogel said. "Very possibly, a program overhaul could even confuse the landscape as the GSEs adopt new rules."
Additionally, loading more programs onto Fannie Mae and Freddie Mac’s agenda at this stage could lengthen their lifespan in the current form.
"That brings complications to the broader finance reform efforts the White House also supports," Vogel explained.
Nonetheless, there are market experts who supports Watt's nomination, believing he could strike a perfect balance between the interest of consumers and financial institutions.
Thomas Miller of the Iowa Department of Justice Office of the Attorney General, who spearheaded the mortgage servicer settlement, is a supporter of Watt.
"Congressman Mel Watt is an outstanding choice for Director of the Federal Housing Finance Agency, he said. "I’ve had the privilege of testifying before Representative Watt and the House Financial Services Committee, and I know him to be a true authority on mortgage issues."
Miller added, "He has a track record of reaching across party lines in the interests of pursuing good public policy, and I'm confident he'll do the same at the helm of Fannie and Freddie."