Efforts to address housing finance reform are starting to heat up, although the finish line is still probably a long way off. Fannie Mae and Freddie Mac remain in conservatorship, even though they are making money, and the Federal Reserve is a major buyer of residential mortgage backed securities. Neither of these conditions is likely to be sustained in the long run. We believe that some sort of GSE housing finance market reform is inevitable and that it will likely involve several core elements, although there could be significant differences in the details.
First, we believe that some form of federally guaranteed housing funding instrument, like a federally guaranteed mortgage backed security, is likely. Such a guarantee would attract funding to the housing market, keep mortgage rates low relative to other market rates and provide some distance between the housing market, which has shown significant volatility over the years, and the banking system. Another "implicit" guarantee seems unlikely given the history of the GSEs in the most recent financial crisis. While some would prefer that housing funding be wholly private, the long history of supporting single family housing in the U.S. suggests that the guarantee route is likely.
Second, private capital almost certainly will wind up standing in front of any such guarantee. There are a variety of mechanisms by which this can be accomplished, but we suspect that there is no appetite for a guarantee system that does not put mortgage originators and other private sector entities in the funding chain at risk and use them as a buffer to protect any federal guarantee. Indeed, a guarantee fund that is limited to private contributions, modeled on the original Federal Deposit Insurance Fund, is a possibility.
Third, we believe that it is likely that a funding vehicle, such as a common securitization platform that can be federally overseen and regulated, is likely to be included in any final legislation.
Fourth, we believe that that there will be a low and moderate income housing component that can be touted as providing a tangible benefit to consumers. This could take many forms ranging from studies to subsidies or grants and almost anything in between.
Finally, we believe that any final legislation will address the status of the current GSEs. Although the simplest approach might be to adjust their current structure to address the issues outlined above, their current portfolios may well be unwound. A process for resolving existing claims may or may not be included.
We will be following this legislation as it winds its way through the Congress. An initial comparison of single-family provisions in the bills currently being discussed is attached.
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