NEW YORK (
) - If you are waiting for a plan from Washington to wind down mortgage finance giants
, don't hold your breath. They aren't going anywhere.
Far from ending their dominance, policymakers are drafting new rules governing the origination and securitization of mortgages that might only strengthen the stronghold of Fannie and Freddie, according to FBR Capital analyst Paul Miller.
"We foresee a continued dominance of the implied government guarantee. While Fannie Mae and Freddie Mac may be ended "in name," Congress will keep the infrastructure in place to further its homeownership goals," Miller wrote in a report titled the "Future of the Housing Market: Winners and Losers."
The Consumer Financial Protection Bureau is in the middle of framing rules including the definition of a "qualified mortgage" and a "qualified residential mortgage" that are likely to have a significant impact on the ability of private-label securitizers to compete in the market, according to the analyst.
The qualified mortgage rule seeks to ensure that banks lend only to those borrowers who have an "ability to pay". Originators who make a non-QM loan, face the risk that the borrower will contest the foreclosure in court that would result at the very least in delays and legal fees. If they originate a "qualified mortgage" they are offered legal protection, though regulators are still debating the nature of the protection.
To avoid the legal risk, banks might end up originating only QM loans, which means there will be no more interest-only loans or no/low doc loans or sub-prime loans -the kind that have traditionally been underwritten by the private-label market.
A separate rule also requires banks to retain at least 5% of the loans they originate on their balance sheet. The rule is meant to prevent banks from originating bad loans and offloading them to investors. But to avoid raising the cost of mortgages, the rule exempts certain "qualified residential mortgages" from the risk-retention.
A draft of the rule Miller notes, exempts mortgages with loan-to-value ratio of more than 80% from risk retention as long as they were securitized by the GSEs.
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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