Originally published in the March 2011 issuance of Asset Securitization Report (www.sourcemedia.com)
The joint Treasury/HUD report to Congress released this month was a major disappointment to market participants looking for a timely resolution to the status of the GSEs and the future of housing finance. While the white paper claims to lay out “the Administration’s plan to reform America’s housing finance market,” it unfortunately amounts to a set of poorly defined policy options that will likely require years to codify and implement. Moreover, its core assumptions are unrealistic and ultimately border on wishful thinking.
While the paper repeatedly and correctly focuses on the need to restore the role of private capital in the housing finance market, its key pronouncements are incomplete. A key proposal in the section on winding down the GSEs is “to bring in more private capital” by increasing guaranty fees. While higher g-fees will certainly help the private market “compete on a level playing field,” it ignores the fact that the private-label markets are currently dormant as a result of a variety of structural factors, some of which stem from recent regulatory and legislative actions such as the Dodd-Frank Act. In fact, elements of Dodd-Frank such as the risk retention requirement and the removal of the rating agencies’ liability exemption have created significant roadblocks and uncertainties for private-label MBS issuers; as I noted in February, the continued inability of regulators to issue working guidelines with respect to the scope and form of risk retention is a major impediment to the non-agency market’s renewed operation.
Without actions specifically designed to facilitate private-label issuance and make it an economically viable alternative to governmentbacked MBS, higher g-fees will simply raise borrowing costs for all consumers. Moreover, creating a “level playing field” in the absence of a revitalized non-agency sector would require primary mortgage rates hundreds of basis points higher than current levels, not merely a 10-20 basis point tweak.
At its core, the white paper outlines three options for the structure of housing finance: 1) a privatized system with limited government support; 2) option 1 with a “guarantee mechanism to scale up during times of crisis;” and 3) basically option 1 with “catastrophic reinsurance” of private mortgage insurers.
As with much of the report, these options are both extremely vague and premised on questionable assumptions. For example, a possible approach for option 2 would be to price guarantee fees so high that they “would only be competitive in the absence of private capital.” Such an approach would be disastrous to the housing markets during times of financial stress, as it would raise borrower costs substantially at precisely the time when mortgage rates would need to be reduced. The “catastrophic reinsurance” of private mortgage guarantors outlined in option 3 may make sense, but the proposal contains no guidance on how the private insurance and government reinsurance would be underwritten and priced.
Given the continued tightening in mortgage credit availability and renewed weakness in home prices, this report is a major disappointment to hopes that the GSEs can be restructured in the next few years. Rather than outlining a set of concrete proposals, the white paper is a plan to create a plan, and effectively puts responsibility for GSE reform in the hands of Congress and an undefined “joint FHFA and FHA working group.” It also bears an unfortunate resemblance to the Obama administration’s earlier housing initiatives, such as HAMP, which were rendered ineffective by poor planning and a superficial grasp of the mortgage and MBS markets. Roughly two and a half years and $150 billion dollars after Fannie and Freddie were placed into conservatorship, we remain far from resolving the future status of the GSEs.
