New regulations affecting the government-sponsored enterprises could hit spreads in the residential mortgage asset-backed market, according to Deutsche Bank's latest quarterly Watchdog report. The bank is warning of the impact now, as a Congressional subcommittee passed the Federal Housing Finance Reform Act of 2005 earlier this year. The bill's primary act would be the creation of a new, stricter regulator for the GSEs. It is expected to be presented to the full House of Representatives for a vote in the coming months.
Although the GSE's influence is most acutely felt in the prime mortgage markets, Deutsche Bank notes in recent years they have become large buyers of home equity ABS and today either Fannie Mae or Freddie Mac--or both--are likely to participate in every home equity deal brought to market. Furthermore, deals from issuers such as Ameriquest Mortgage, First Franklin and Aames Financial have experienced a particularly high level of participation from the GSEs this year, according to Deutsche Bank.
The concern is that tougher regulation could force the GSEs to curtail their investments in the sub-prime space, which would likely result in wider spreads across the asset class. Specifically, Deutsche Bank warns short triple-A floaters could experience a short-term widening of five basis points, while eight-year classes could back up as much as 35bps if the GSEs did scale back their participation. "Of course, such widening would then presumably have the effect of attracting buyers for whom triple-A home equity ABS has become too rich of late," wrote Katie Reeves, director in ABS research at Deutsche Bank.