This will create a preference for loans to be securitized by the GSEs. The preference, along with the guarantee on principal and interest on Fannie Mae and Freddie Mac securities, and the end of sub-prime product features should make the return of "meaningful private securitization extremely unlikely," according to FBR.
While the government has talked about reducing the role of the GSEs in housing market, it remains to be seen if there is political will to do so.
For one, no one wants to shake up the housing market while the economy is still weak, though some believe that Obama as a second-term president might actually be best placed to take on GSE reform. No first-term President will wade into the political mess that is housing.
More importantly, as Miller notes, Fannie and Freddie's profits now go directly to the GSEs.
Earlier this year, the U.S. Treasury changed the repayment requirements on the capital provided to Fannie Mae and Freddie Mac as part of their conservatorship. Under the previous agreement, Fannie Mae and Freddie Mac had been responsible for a 10% annual dividend paid quarterly. The new agreement requires a quarterly transfer to the Treasury of all profits of Fannie Mae and Freddie Mac.
"Some have argued that this change is a reduced payment for Fannie and Freddie, as most quarters resulted in one or both of the GSEs borrowing funds from the Treasury to cover the dividend that was owed," the analyst said. "We believe that the true result of this change will be the establishment of Fannie and Freddie as a significant source of revenue for the federal government for years to come. It remains uncertain as to whether the federal government will recoup its overall investment in the GSEs; however, the quarterly sweep of profits is likely to provide a revenue stream to the U.S. Treasury that will prove difficult for policymakers to abandon."
--Written by Shanthi Bharatwaj in New York
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