GSE White Paper Outline Leaked. No Surprises Shared

Reuters has shared a sneak peek at the Obama Administration’s GSE Reform White Paper, which is due tomorrow.</p

Here are the headlines that just flashed in RED across Eikon….</p

15:11 10Feb11 RTRS-OBAMA HOUSING WHITE PAPER DUE FRIDAY INCLUDES OPTION TO CREATE FDIC-LIKE INSURANCE FOR MORTGAGE-BACKED SECURITIES — SOURCES</p

15:11 10Feb11 RTRS-OBAMA WHITE PAPER INCLUDES GOVT BACKSTOP OF MORTGAGES DURING NORMAL TIMES BUT PRIVATE MBS INVESTORS WOULD TAKE FIRST LOSS — SOURCES</p

15:11 10Feb11 RTRS-OBAMA PAPER TO OFFER ALTERNATIVE OPTION TO CREATE GOVT SYSTEM THAT WOULD PROVIDE GUARANTEE ONLY DURING TIMES OF CRISIS — SOURCES</p

15:11 10Feb11 RTRS-OBAMA PAPER TO OFFER THIRD OPTION OF LEAVING FHA AS ONLY PROVIDER FOR GOVT-BACKED MORTGAGES — SOURCES</p

15:11 10Feb11 RTRS-OBAMA PAPER SEPARATELY BACKS GRADUAL WIND-DOWN OF FANNIE MAE AND FREDDIE MAC — SOURCES</p

This is the perspective we shared on the topic last week…</p

The Obama Administration is expected to release a white paper on the future of housing finance next week. Please notice our apathy on the topic. That stems from the fact that we do not expect final guidance to be offered. We expect the Administration to present a few potential pathways towards reform. We know there is a clear intention to lessen the mortgage market’s reliance on government backed financing. To accomplish that goal the Administration will encourage private investors to re-liquidate the non-agency secondary market. This is another step in the right direction but by no means the end of what will be a long drawn out process Reforming the housing finance mechanism will take much time and even more debate. Getting it right the first time is of the utmost importance. </p

We’ll wait for the White Paper to confirm the “leaks” shared by Reuters, but this all seems pretty par for the course.  I can’t wait to see how they decide to deal with Fannie and Freddie’s loan portfolios. Good bank/Bad bank resolution authority needed…..</p

In terms of the impact on the MBS market and current coupon valuations, this “headline event”  has already been leaned on as motivation for fast money day traders who need an axe to grind. Yield spreads are indeed wider into lower prices today so the implied headline risk will likely be pointed to as the reason behind it. Lower and wider hasn’t been uncommon lately though. Production MBS coupons have recently moved off very rich spread levels so maybe it’s more axe grinding. Or maybe it’s a legit move wider because of GSE reform. Either way we’re teetering on a “snowball selling” driven event that would firmly push the production MBS coupon up to 5.00% and lead “Best Execution” mortgage rates higher (5.375%).   READ MORE ABOUT THE SHIFT IN PRODUCTION COUPONS

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