Treasury leaks: Government to reduce role in Fannie, Freddie

by JON PRIOR

Treasury Department leaks from its upcoming white paper on the future of housing finance hint that the government could be looking to draw down its role in supporting Fannie Mae and Freddie Mac, analysts are reporting.

"That is the message the administration was sending. The overall theme is a smaller role for government in the mortgage market even if it results in higher costs for consumers," MF Global, a policy research firm based in Washington, said Monday.

FBR Capital Markets, too, said the government is looking to reduce its role in the mortgage market, citing their conversations with Washington contacts.

"We expect Treasury to call for a reduced government role over time in the mortgage market, with the ultimate goal of a reduction from more than 90% in 2009 to 50%," FBR said. "We believe a reduced role is a given, but would not expect a reduction to the 50% mark for at least five years."

The Dodd-Frank Act called on the Treasury to submit a white paper on the possible outcomes of troubled mortgage giants Fannie and Freddie, discussing, among other things, who will fund the mortgage market and how big of a role the government will play. Earlier this month, the Treasury said it was delaying its deadline from Jan. 31 and would instead release the white paper in the middle of this week.

The Treasury did not immediately comment on the alleged leaks.

Many Republicans have called for a return to the private market, including Rep. Scott Garrett (R-N.J.), who spoke Monday at the American Securitization Forum's annual conference in Florida. Meanwhile, a group of scholars forming "Mortgage Finance Working Group" at the left-leaning Center for American Progress, argued for the need to create a catastrophic risk fund to continue to attract investors.

MF Global saw similar suggestions from the Treasury leaks, implying that the government may not be able to exit the market entirely.

This catastrophic insurance fund would be a backstop for timely principal and interest guarantees that Fannie and Freddie make. According to MF Global, the government-sponsored enterprises would pay into this fund, but Congress would have to approve it. This, the analysts say, will have a hard time gathering GOP approval.

Other suggestions from the Treasury may include pricing out the agency mortgage-backed securities market, raising fees on these investments to open the door for the private-label RMBS market.

Analysts at JPMorgan Chase (JPM: 45.50 +2.04%) have also seen signs of the government trying to shrink the market share for Fannie and Freddie. They suggested combining the Freddie Mac Gold and Fannie Mae securities programs.

"Such a program could be done independent of the pace of GSE reform overall. We expect that overall mortgage liquidity would improve significantly as coupon sizes increased," JPMorgan analysts said in a report released Monday.

Analysts at both MF Global and FBR said there are still signs of the government allowing the higher conforming loan limit supported by Fannie and Freddie to expire Sept. 30. Under the current system, the maximum GSE loan is $729,750, but no action is taken to extend this raise, the loan limit would fall back to $625,500.

Still, the white paper does not mean reform is near. This morning, Bank of America Merrill Lynch analysts said there would be no significant action on the GSEs for another six years, while the Royal Bank of Scotland suggested last week that the process could take as long as 15 years.

If the government does decide to withdraw from Fannie and Freddie and give back market share to the private market, analysts said the nation's largest banks will reap the most rewards.

"Government plans to scale back the role of Fannie, Freddie and the FHA open the door for the private sector to step in the breach," MF Global said. "We believe this represents an opportunity to the mega banks, which have balance sheets that could be used to originate mortgages and investment banking units that could securitize those mortgages."

URL to original article: http://www.housingwire.com/2011/02/07/treasury-leaks-government-to-reduce-role-in-fannie-freddie