If you've been keeping up with housing headlines over the past month you've probably felt a bit overwhelmed by all the different perspectives and opinions that have been offered on the future of the housing finance system. Just about every economist and bond market analyst has shared their view on the topic, including us. Although no direct plan has been provided by the Administration, a general outline was released today.

HERE IS THE RECAP...HOUSING FINANCE REFORM: Reduced Loan Limits, Larger Down Payments, Higher FHA MIP Fees

AND OUR INSTANT REACTION....

The first thing to take away from this paper is the Administration's intention to wind down Fannie and Freddie on a responsible timeline. That tells you this reform/winding down process will take many years and much debate. 5 to 7 years according to Treasury Secretary Tim Geithner.  There's nothing wrong with that though. Slow and steady works as long as lenders have funding liquidity in the process. The main goal is to get housing finance reform done right....the first time, this market can only take so much more stress, rewriting regs repeatedly would be detrimental to the overall housing recovery process.

Next on the list of observations is a tightrope transition from government supported loan funding to private investor supported loan funding. It appears the Administration is taking an "if we don't do it, someone else will" approach. They will attempt to accomplish their objective of reducing the government's "footprint" in the secondary mortgage market by tightening underwriting guidelines and raising fees. They believe this will effectively "level the playing" field and lower the barriers to entry for private investors. We hope risk retention (skin in the game) regs don't "unlevel" that playing field.

Plain and Simple: In the short run, at least for loan pricing and mortgage rates,  the most important debate should be focused on Risk Retention reform. There is a considerable amount of content already published on MND addressing the core issues at hand. Here are just a few....

Proposed Risk Retention Reform Affects Banker and Broker Loan Pricing

Pending Risk Retention Guidelines Create More Confusion in Mortgage Industry

MBA Urges Flexbility in Interpretation of Risk Retention Regs. What Counts as Qualified?

Bill Berliner: The Risk Retention Debate

WSJ: "Mortgage Rules Delayed In Regulator Spat"

NOW WHAT?

There is much "reading and reacting" ahead for us.  The Administration expects the industry to provide feedback and perspective on their proposals.  We'll do our best to put the important information in front of you. Your job is to share personal opinion based on personal experience. What will work and what won't work?

Reuters has accumulated feedback from various experts. This should help get the ball rolling.....

RTRS-FACTBOX-Winners and losers in the Obama housing plan

Reporting by Maria Aspan, Ben Berkowitz, Joe Rauch and Al Yoon, editing by Dave Zimmerman

Feb 11 (Reuters) - The Obama administration declared the death of the existing U.S. housing finance system on Friday, setting in motion an uncertain project that will take years and reshape the way Americans buy and own homes. Following is a rundown of who stands to be the biggest winners and losers from the administration's plan to wind down government-controlled mortgage buyers Fannie Mae and Freddie Mac:
  
THE WINNERS...

Big banks that are willing to invest in mortgages: The proposed reforms will likely help the bank industry, especially larger firms, by allowing them to raise the prices that they charge consumers for mortgages, analyst Paul Miller of FBR Capital Markets said.
  
Mortgage securitizers: Wall Street firms have said record low interest rates and government competition have been a major factor keeping them out of the mortgage credit market. But reducing the government's role can be a "game changer," Martin Hughes, chief executive officer of Redwood Trust, said at a securitization conference this week.

"Why isn't the private sector up and running? It really is uber-government support for mortgage financing," said Hughes, whose real estate investment trust profits by taking on the riskier parts of private securitizations.

 Wall Street investment firms have been rebuilding mortgage finance desks since 2009. Other non-bank entities such as PennyMac Mortgage Investment Trust, asset manager BlackRock Inc and private equity firm WL Ross & Co. have laid foundations for private lending in recent months.

But after the housing crisis, many investors are still reluctant to load up on mortgage-backed securities that don't have a government guarantee linked to them. It could take years for faith in securitization to return to prior levels.
  
Mortgage insurers: Private mortgage insurance backstops home loans where the buyers make a down payment smaller than 20 percent of the purchase price. Buyers pay for it but the insurance protects the lender's interests. Insurers collectively face potential claims on hundreds of thousands of delinquent mortgages from the last few years, but could be reinvigorated if they get the opportunity to write large amounts of new business in years to come.  The end of Fannie and Freddie is expected to bolster top industry players MGIC Investment, Radian Group, PMI Group and Genworth Financial. Shares of all four surged on Friday.

THE LOSERS...

Homebuyers: The biggest losers in the Obama administration's reform proposals will inevitably be people seeking to buy a home, or people that own homes. Treasury Secretary Timothy Geithner conceded on Friday that mortgage costs will rise in coming years, as government support is withdrawn and the private sector takes on a bigger role. The ultimate shape of the reforms is far from clear, however, and no one is able to say exactly how the changes will translate into bottom-line costs for homebuyers.  Credit Suisse speculated this week that rates on a basic 30-year fixed mortgage could rise as much as 2 percentage points if the government withdrew its backing of Fannie Mae and Freddie Mac.    Higher mortgage rates could make homes less affordable for buyers, and could also weigh on home prices, hurting sellers.
  
Banks that sell mortgages to investors rather than holding them: Smaller banks that have traditionally sold most of their mortgages to Fannie and Freddie have less ability to hold large mortgage portfolios on their balance sheets, and are more likely to suffer from the proposals, FBR's Miller said. Banks that operate as agents and have traditionally sold most of their mortgages to the GSEs or private investors, such as Bank of America Corp are also expected to have to adjust their business models as a result of the proposals.
  
Wall Street: In the near term, Fannie and Freddie's demise could hurt the Wall Street firms that help sell their bonds and hedge their interest-rate risk. As two of the most regular issuers in the country, the government-sponsored enterprises were a steady source of fees for a roster of major investment banks. In the long-term, these issues could be more than offset by the banks' profits from securitization and higher mortgage rates, which is why many big banks for years have been lobbying for the government to decrease its support for Fannie Mae and Freddie Mac.

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