GSE reform is a philosophical posture, not a policy
There's no true political will to end the dominance of Freddie Mac and Fannie Mae in RMBS. The talk in Washington of restoring the private label RMBS market is driven more by a philosophical push against smaller government than by a coherent plan for change, or a willingness to face the trade-offs it requires.
The US mortgage market is a near duopoly, with the government sponsored enterprises (GSEs) controlling the lion’s share of RMBS securitizations. This has grown even further this year through their credit risk transfer (CRT) and agency credit insurance structure (ACIS) programmes.
With the financial crisis and government receivership of the GSEs almost a decade old, talk has once again returned to the future of both organisations and the prospect of making US private label mortgage securitizations great again.
In this light, Republicans in Congress have called for the US government to scale back or entirely wind down its position in the market. That's a tough sell, given that not only have Fannie and Freddie been the main issuers of RMBS in the years since the financial crisis, they also own or insure $4.6tr in US residential mortgages, or 45.9% of the total US mortgage market.
In response to political and market pressure to change, the Federal Housing Finance Agency (FHFA) has made all the right noises, but failed to convince.
The agency, which oversees the activities of the GSEs, reached out to investors and industry bodies with a request for input (RFI) on both Fannie’s and Freddie’s risk transfer programmes in June, though some industry stakeholders were less than impressed by the move.
“I don't get a sense that they really want to engage the RMBS market. I think that they want to be able to go about their business while making sure that nobody in Congress can come back to them and ask why they haven't been engaging the market,” said a Washington source who has worked with the RMBS market and the FHFA.
“To ask for people to comment within 60 days during the dead of summer is a pretty clear indication of where their head was when they were thinking about doing this.”
The deadline for the RFI has been extended by the FHFA until October. It was originally set to expire on August 29, but the attitude from investors working with the FHFA has not been positive.
One investor said that the market response to the RFI has been pretty negative, with investor consultation calls often turning into griping sessions about how CRT deals are hindering the comeback of private label RMBS.
The Washington source noted that investors and advocacy groups who have worked with the FHFA have expressed the view that the agency was to some extent just “going through the motions” of engaging the private market.
He added that this was the feeling for both the CRT reform proposals and other FHFA market initiatives, such as the single securitization platform for RMBS. Some private market advocates in those discussions have gone even further, expressing the view that the process of "working with the FHFA" was less of a consultation and more of a directive.
However, not everyone is so down on government efforts towards reform. Many in the market still believe that the agencies are doing all they can and an RMBS analyst said that all the evidence and statements from the FHFA suggest that it is still behind reform.
FHFA director Mel Watt has also spoken positively about GSE reform, and Republicans in Congress have stressed the need to end government control of the housing market.
Congress must act, but won't
The view taken by the agency, and Watt himself, was made clear in July when he wrote a letter to a number of industry groups which said that the continuing conservatorship was not a “desirable end state” and that GSE reform should be undertaken by Congress.
The FHFA has also continued to work with industry groups on the single securitization platform, indicating some desire for change.
However, Watt’s view that meaningful reform must come through Congress, and then be signed off by the administration, means that any change will depend on political will in Washington, rather than on any specific FHFA policy.
But both the executive and legislative branches may not share the belief that substantive change is needed, even if some legislators pay lip-service to the need to shrink the government's role in the mortgage market.
The US mortgage market has strengthened significantly since the financial crisis, with the status quo allowing greater access to mortgages and housing while also catering to the securitization market's appetite for risk through the issuance of CRT bonds.
“When you look at the political benefits and the financial benefits for the federal government for continued GSE dominance, it overwhelms the philosophical interest in strengthening the private market,” said the Washington source.
“So on the one hand you have got a very strong real estate lobby and consumer advocacy lobby who are lining up and saying that they want it to be easier for people to get mortgage loans and that leans towards the GSE direction.”
Mistrust of the financial services industry among the electorate in the years after the 2008 crisis, and a deeply divided view among politicians in Washington, both point to maintaining the status quo. It would be a potentially disastrous leap of faith for Congress to introduce any measure that could restrict mortgage credit to US homeowners.
“People say, ‘well philosophically I believe we shouldn't have this [government] dominance’, but the implication of either raising guarantee fees or forcing an unwind of the GSEs is huge, and there just isn't the political will for it to happen because they don't want the negative effects on the budget or at the polls,” said the Washington source.
Finally, even in the highly unlikely event that a political consensus could be reached in DC, ending GSE RMBS dominance would be a big hit to the coffers of the US Treasury. According to reports in April, the Treasury has taken in $246bn in dividends from both Fannie and Freddie from its sweep of their profits.
“You have also got all the money that is flowing from the GSEs to the US Treasury,” added the DC source. “The Treasury doesn't want to see that go away, and even if it did the executive branch doesn't.”