New Bill Suggests GSE Reform is Forthcoming (FNMA) (FMCC)

December 9, 2016 12:44 PM EST
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GSE's Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) are higher Friday in part on positive commentary from Cowen Washington Research Group analyst Jaret Seiberg. The analyst believes new bill HR 6487 is bullish for GSE reform as it suggests bipartisan support for expanding credit risk transfers.

The bill from Reps. Ed Royce and Gwen Moore requires FHFA to impose a broader credit risk transfer requirement on Fannie and Freddie. What makes the bill noteworthy is that it is bipartisan as Royce is a California Republican and Moore is a Wisconsin Democrat.

"This suggests there is at least the starting point for housing finance reform," he said. "The legislation won't advance in this Congress, but Royce said he would re-introduce it early next year to set the stage for action."

Seiberg comments that they understand that some in the market believe that Fannie and Freddie should not engage in risk sharing because they give up too much economics with each transaction. There is also the argument that Fannie and Freddie historically have been adept at managing mortgage credit risk so there is no need for such transactions.

For the point of their argument, it does not matter if those contentions have merit. What counts, he said, is that there is a bipartisan push to diversify the holders of mortgage credit risk.

"Once there is acceptance of credit risk transfer as a way to put private capital at risk, then it is easier to see how Fannie and Freddie could emerge from conservatorship to play some role in a future housing finance system," he said. "This is because advocates can argue that Fannie and Freddie are fundamentally different because there is more private capital ahead of them."

They believe the legislation reflects a broad consensus on Capitol Hill that risk transfers should proceed. The legislation is especially beneficial for mortgage REITS -- which could participate in credit risk transfer deals -- and mortgage insurers as it would require an experiment with deep MI.

FNMA is up 3.5%, FMCC is up 3%.

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