The End of Fannie (FNMA) and Freddie (FMCC)?

Shares of GSEs Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) are down sharply today after the Senate Banking Committee leadership announced that they have reached a housing finance reform agreement which includes the language - "Wind down and eliminate Fannie Mae and Freddie Mac," among other things.

Fannie Mae is down 30%, while Freddie is down 27%.

Commenting on the development, Compass Points's Isaac Boltansky notes: "The announcement included a statement of principles, which we include below, but the legislative language has yet to be released. The announcement states that the legislative language will be released “in the coming days” and that the Senate Banking Committee will hold a markup “in the coming weeks.” The announcement of an agreement, and the forthcoming legislative language, mark another positive step in the ongoing efforts to overhaul the nation’s mortgage finance system. While we continue to believe that there is neither the legislative bandwidth nor the market capacity to undertake GSE reform in this Congress, this effort will advance the discussion in D.C. for the next Congress."

Commenting on what stood out in the agreement, Boltansky said: "The announcement states that the Johnson-Crapo bill starts with Corker-Warner (S. 1217) “as the base text and generally maintain its overall architecture.” At its core, this proposal echoes Corker-Warner which calls for the liquidation of the GSEs, the creation of a Federal Mortgage Insurance Corporation (FMIC) which would operate in a manner similar to the FDIC and wrap covered loans with a government guarantee, and mandate a 10% first-loss requirement for private capital. Despite the lack of specifics in this announcement, a number of elements stood out to us:

1. The Corker-Warner proposal’s 10% first-loss requirement for private capital is maintained in the Johnson-Crapo proposal despite calls to lower the threshold;
2. The Johnson-Crapo bill would set underwriting parameters for covered mortgages similar to the CFPB’s Qualified Mortgage (QM) rule but would also include a 5% down-payment requirement (3.5% for first-time buyers);
3. The Johnson-Crapo bill will “eliminate affordable housing goals” but will include a 10bps user fee for the new guarantor which would be directed to ensuring that there is “sufficient decent housing available.” We note that the most significant concern for affordable housing goals is not the funding mechanism, but rather deciding which entity sets and monitors the goals;
4. The release highlights the creation of a “mutual cooperative jointly owned by small lenders” which is included to facilitate market access for smaller lenders, a priority of many on the Senate Banking Committee;
5. Despite a lack of specifics regarding the multifamily market, the release did include the following supportive language: “Maintain a vibrant multifamily market by building upon successful risk-sharing mechanisms and products and providing access to a broad range of markets.”

Rhetorically asking if GSE Reform Become Law in 2014, the strategist said "NO." "We continue to believe that Senate leadership is unlikely to push GSE reform in this session even if legislation clears the Senate Banking Committee. Senate Democrats appear content with the GSEs in the near-term given the confirmation of Mel Watt as FHFA Director, the continued profits generated by the GSEs, the steady recovery in the housing market, and the political pitfalls of tackling housing issues in an election year. Furthermore, we continue to believe that Congressman Hensarling (R-TX) is unlikely to alter the House GSE reform proposal known as the PATH Act. House GOP leadership, much like their Senate counterparts, is likely to avoid the issues of housing reform as well, given its aversion to making the rank-and-file take tough votes in an election year. We continue to believe that GSE reform will not become law in this Congress and instead view 2015 or 2017 as far likelier dates for legislation to head to the President’s desk. We include below a table detailing our thoughts on the prospects of GSE reform in this Congress."

Some details of the agreement that Chairman Johnson and Ranking Member Crapo have reached that will form the basis of a bipartisan housing finance reform text:

• Start with S.1217 as the base text and generally maintain its overall architecture.
• Wind down and eliminate Fannie Mae and Freddie Mac.
• Promote a smooth and stable transition from the old system to the new system by providing specific benchmarks and timelines to guide Federal Mortgage Insurance Corporation (FMIC) and market participants.
• Transfer appropriate functions to the modernized, streamlined and accountable FMIC, modeled in part after the FDIC including its regulatory authority.
• Mandate 10 percent private capital, up front, and create a mortgage insurance fund for the system to protect taxpayers against future bailouts.
• Create a member-owned securitization platform that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued in a manner that encourages standardization and improved market liquidity.
• Establish a mutual cooperative jointly owned by small lenders to ensure institutions of all sizes have direct access to the secondary market so community banks and credit unions are not at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved. The small lender mutual cooperative would provide a cash window for individual eligible loans, and small lenders could retain servicing rights.
• Provide clear rules of the road for servicers that choose to participate in the FMIC system.
• Maintain a vibrant multifamily market by building upon successful risk-sharing mechanisms and products and providing access to a broad range of markets.
• Require strong underwriting standards that mirror the definition of “qualified mortgage”, and set down payment requirement at 5 percent (with a short phase-in) except for first-time homebuyers at 3.5 percent.
• Facilitate the broad availability of credit for eligible single-family and multifamily borrowers, monitor consumer and market access to credit, and provide market based incentives and transparency to serve underserved areas.
• Eliminate affordable housing goals and establish transparent and accountable housing-related funds that would focus on ensuring there is sufficient decent housing available. The funds are NOT paid for with tax dollars, but through a small FMIC user fee (10 basis points) that only those who choose to use the system pay.
• Allow current conforming loan limits to be maintained so that mortgage credit continues to be available in high cost areas.
• Maintain broad liquidity in the To-Be-Announced (TBA) market and direct FMIC to take into account the impact of new products on the TBA market.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• 30-year mortgage rate dips to 6.65%, second weekly decline
• Bessent on Iran: maximum economic pressure means likely not a kinetic restart
• Ackman adds Netflix, Visa and Mastercard in portfolio revamp