Moving toward a uniform MBS for the two government-sponsored enterprises is widely viewed as a good thing for bond investors – and the mortgage industry at large – but it creates new potential risks if things go haywire, according to Fannie Mae.
GSE earnings bounced back to a profitable status, as expected, in the first quarter, with Fannie Mae and Freddie Mac reporting a combined $7.2 billion profit. That number is up from the $9.4 billion earnings hit the GSEs took last quarter due to tax reform that went into effect in December 2017. [Includes one chart.]
Fannie Mae and Freddie Mac are in their 10th year of conservatorship and GSE shareholders rights group, Investors Unite, complained about reform still being in limbo. “No one in Washington has answers to fundamental questions about the future of affordable housing, the 30-year mortgage, and basic rights of shareholders,” said IU. Yet, the group noted that the GSEs continue to funnel their earnings to the Treasury Department, per the terms of the net worth sweep. In June, Fannie expects to pay Treasury a $938 million dividend payment.However, IU said the GSEs could be at risk for another taxpayer-funded bailout as long as the Trump administration delays needed reform “and allows the Obama Treasury Department’s net-worth sweep to remain in place.”
The conversation on GSE reform has shifted heavily as we approach midyear, having gone from optimism on congressional legislation to discussions on administrative options. And two Washington, DC-based think tanks recently offered their thoughts on reform and both point to 2019. Treasury Secretary Steve Mnuchin said last week that housing-finance reform will not happen this year. Karen Petrou, managing partner with Federal Financial Analytics, called this the “death knell” for GSE reform in this Congress. And she added that he didn’t seem sorry to deliver it. “With Mel Watt’s term as Federal Housing Finance Agency director coming to a close, Treasury...
Mel Watt has a good seven months left on his term as director of the Federal Housing Finance Agency, but already the industry rumor mill is speculating on whom the White House might pick to replace him.So far, the names run the gamut – from “reasonable” picks such as Treasury counselor Craig Phillips or acting Ginnie Mae President Michael Bright, to some odd choices: former FHFA acting director Ed DeMarco or current House Financial Services Committee Chairman Jeb Hensarling, R-TX.Few in the industry buy the Hensarling choice except for the fact he’s an arch conservative, something President Trump likes in his appointees.
Some in the industry have criticized Freddie Mac’s Integrated Mortgage Insurance credit-risk transfer program, but its founders recently spoke out to clear the air on a number of misconceptions. Top executives at both Arch Capital and Freddie defended the new credit-risk transfer program in which they are partners. A group of mortgage insurers complain that the program creates an unlevel playing field and promotes “capital arbitrage.” Andrew Rippert, CEO of Arch Capital, said during a recent industry conference that counterparties must keep up with changing times. He said one of the goals of IMAGIN is to deliver a more efficient form of mortgage insurance at a lower cost to borrowers.
The GSEs are preparing to issue their first credit-risk transfer under the real estate mortgage investment conduit structure in 2019 and analysts predict, while it will be a boon for new investors, it’ll take time to ramp up. Freddie Mac plans to issue its first credit-risk transfer deal as a trust execution this month in preparation for the new REMIC structure, according to Michael Reynolds, vice president of credit-risk transfers. The GSE has been issuing its Structured Agency Credit Risk notes as debt and the new structure will be a more traditional trust issuance.
Freddie Mac’s recent decision to extend a line of credit to a nonbank seller/servicer has set off a mini firestorm, with some industry stakeholders taking issue with a government-controlled company providing a service readily available from the private sector. As one industry consultant phrased it: “It sounds to me like they’re undercutting the warehouse banks.”The credit in question is an LOC collateralized by a mortgage-servicing portfolio whose size is reportedly in the range of $5 billion to $7 billion. The loan amount was not released, but could total $50 million, said one advisor who claimed to have knowledge of the transaction.
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