NEW YORK (TheStreet) -- Big banks and mortgage insurers are likely to see the greatest benefits from changes to the bailout of Fannie Mae (FNMA) and Freddie Mac (FMCC) unveiled by the U.S. Treasury Department and the Federal Housing Finance Authority last week, according to a report published Monday by FBR Capital Markets.
The Treasury bills the changes as "further steps to expedite [the] wind down" of the government-sponsored enterprises (GSEs), which have received some $200 billion each in taxpayer support since being put into conservatorship by the Treasury in 2008. As part of the changes, the GSEs investment portfolios will be wound down at 15% annually as opposed to the previous 10% rate.
However, FBR analyst Ed Mills points out that the accelerated wind down "does not limit the amount of loans that Fannie or Freddie can guarantee; this is just the loans in their retained portfolio." As a result, "nothing in this agreement reduces the dominance of Fannie and Freddie in the securitization of conforming loans."
The GSEs currently guarantee the overwhelming share of U.S. home loans, and will continue to do so. So while Treasury claims it is winding down the institutions themselves, what it is really doing is winding down the percentage of loans they carry on their balance sheets. The rest are securitized and sold to investors, with the GSEs still standing behind them if the borrower fails to pay.In order for the GSEs to stand behind a loan, however, it must meet certain predetermined criteria. An increasing number of rules for mortgages are only making those criteria more strict. And who better to meet those criteria than a home lending factory like Wells Fargo (WFC)JPMorgan Chase (JPM),US Bancorp (USB) or PNC Financial (PNC) that can take advantage of economies of scale? Mills mentions all these institutions as likely beneficiaries in his report. Mills also sees a benefit to private mortgage insurers from last week's announcement. He notes that both the Treasury's announcement as well as a statement from the FHFA, which oversees the GSEs refer to a "strategic plan" for the GSEs released by the FHFA in February. That plan states that "while some mortgage insurers are facing financial challenges as a result of housing market conditions, others may have the capital capacity to insure a portion of the mortgage credit risk currently retained by the Enterprises. This could be accomplished through deeper mortgage insurance coverage on individual loans or through pool-level insurance policies." As the GSEs take fewer loans on their balance sheets, then, it will give mortgage insurers an increasing opportunity to pick up some of the slack, Mills contends. Shares of mortgage insurers have been strong performers since the Treasury's announcement Friday morning. From Friday's open through late afternoon trading on Monday, shares of MGIC Corp. (MTG), Radian Group (RDN) and Genworth Financial (GNW) were up 4.2%, 5.25% and 3.77%, respectively. -- Written by Dan Freed in New York. Follow this writer on Twitter.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV