Investors Shouldn't be Worried about FHFA's Plan to Merge GSEs -Report

by devteam March 11th, 2013 | Share

Bank of America/MerrillrnLynch (BAML) is cautioning its institutional investors against being unsettledrnby the announcement last week of development of a potential commonrnsecuritization platform for Fannie Mae and Freddie Mac mortgage loans.  In an AgencyrnMBS Alert the Bank said that the decision by the Federal Housing FinancernAgency (FHFA) to begin work on such a structure appears to have sparkedrninvestor fears about potential market disruptions but instead could be useful “inrna wide variety of future frameworks.”</p

FHFA’srnActing Director Edward J. DeMarco announced in a speech on Monday that thernagency, which acts as conservator for Fannie Mae and Freddie Mac (the GSEs)rnwould be establishing an independent entity to implement a new securitizationrnstructure to replace the existing GSE platforms.  The new entity, which would be initiallyrnfunded and owned by the GSEs, is an outgrowth of the agency’s 2012 StrategicrnPlan for the GSEs. </p

BAML said therninitial headlines about the new entity aroused fears that there might be a near-term phase-outrnof existing agency MBS securities</ain favorrnof somernnewrnuniversal MBSrnsecurity or that the two GSEs mightrnbe merged with potential negativernresults for MBS and debt markets.  The bank said these fears, in their view are unwarranted.rn “We do notrnexpect any changes inrnthernnext several yearsrnto thernsecuritization framework or tornthe structure of Fannie andrnFreddie. And in fact, we believe there is a significantrnprobability that a commonrnsecuritizationrnplatform may not materialize at any time in the future.”  The Alert</ihowever said it does see "a vision for the future of housingrnfinance which shiftsrnawayrnfrom the guarantor-centric model that has sornfar prevailed."</p

Congress has taken no action onrnGSE reform so FHFA has taken steps to determine how best it can define its ownrnmission as conservator.  In 2010 DeMarcornidentified loss mitigation as the central purpose along with reducing thernretained portfolios as mandated in the stock purchase agreements with the TreasuryrnDepartment.  By early 2012 this hadrnevolved into the Strategic Plan with a “Build, Contract, Maintain” theme.  The “Build” component included developing arnnew infrastructure for the secondary mortgage market; a need which had becomernclear because implementing new programs was both costly and time, especially asrneach GSE had its own system with its own time frames, costs, and challenges.  With the GSEs still at the center of mortgagernfinance for the foreseeable future it was clear that developing a single systemrnwould be more cost effective than separate systems and it made financial sensernto modernize the structure in a manner that could be used into the future evenrnif the GSEs were no longer around.</p

BAML says therndevelopment of a single securitizationrnplatform does not imply the development of a singlernMBSrnsecurity. The markets andrnthe press came to this conclusion but it is not part of the Strategic Plan, “and inrnfact contradicts the purpose of the Buildrncomponent, in ourrnview.”</p

The bank says that a merger of the GSEs might well bernpart of a reform package from Congress but it is not part of the FHFArnStrategic Plan, and a singlernMBS security is not what FHFArnaims to achieve.</p

The “Contract” goal of the Strategic Plan was aimed at reducing thernretained portfolio and the dominant GSE footprint in the market and is beingrnachieved by slowly raising the guarantee fees to encourage privaternparticipation in the market.  Bringingrnprivate capital back is a bipartisan goal. rnBanks might also decide to retain loans to share in the profits the GSEsrncurrently earn and a single securitization platform could aid in this shift,rnespecially if it allows the GSEs to sell parts of their credit risk. </p

Thern”Maintain” goal representsrnthe core focus on lossrnmitigation and foreclosurernprevention, but also includes creditrnavailability. rnThis may result in an extension ofrnthe HARP expiration date beyondrn31 December 2013.</p

The Alertrnsays that the Build,rnContract, and Maintain sectionsrnofrnthe February 2012 plan have become parts of strategic goals to establishrnstandards for a safer and more efficient housing finance system andrnmaintaining stability, liquidity, and access to mortgage credit.  Thus, disrupting the mortgage market byrneliminating one of the GSE issuers would defy several of these strategic goals</band  the task of buildingrnnew infrastructurernis now explicitly categorized asrnpreparation forrnfuture housing finance, rather thanrna plan to potentially changernor disrupt today'srnmortgage markets.</p

The Bankrncautions that there are many reasons why the new structure may not evenrnhappen.  The Strategic Plan has been developedrnby the current FHFA acting director of the FHFA and is not law. rnIf or when a new director takes over, the more ambiguous interpretationsrnof FHFA’s role, such as designing a Common Securitization Platform,rncould be scrapped.  As the CSP planrnis still in its earliestrnstage, eliminating it couldrnbe consideredrna cost cutting move; alternatively the government could create incentivesrnfor the private market to develop one,rnor enter into a jointrnventure with thernprivate side to do so.</p

There are many questions about the CSP such as ways to set uniform standardsrnwithout impacting competitivenessrnand how a CSPrnwill balance betweenrnthe interests of the government, borrowers, securitizers,rnrating agencies and investors?</p

BAML concludes that even if work continuesrnon the CSP the goal is not to create a single security or disrupt thernmarket.  Any merger of the two GSEs wouldrnlikely be at the discretion of Congress and would be, at this stage, bothrncomplex and costly

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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