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Mortgage Credit Costs, Access Present Challenges for GSE Privatization

The Federal Housing Finance Agency announced Monday that it has selected Houlihan Lokey Capital, Inc., as its financial advisor to assist in the development of a plan to end the conservatorship of Fannie Mae and Freddie Mac. 

Tim Rood, Chairman and co-founder of the Collingwood Group, told MReport that this announcement is an “important milestone” in the process to end conservatorship of Fannie Mae and Freddie Mac. 

“The FHFA still needs to produce a capital plan from which the advisor will work from to develop a capital restoration roadmap for the GSEs,” Rood said. 

He added that the capital plan is expected to be published by the FHFA within the next 30-90 days. 

According to the agreement, Houlihan Lokey has up to one year to produce a plan to end privatize the GSEs. 

The FHFA’s report states Houlihan Lokey will consider business and capital structures, market impacts, timing, and available capital raising alternatives among other items. 

“Hiring a financial advisor is a significant milestone toward ending the conservatorships of the Enterprises," said FHFA Director Dr. Mark Calabria. “The next major milestone for FHFA is the re-proposal of the capital rule, which will happen in the near future."

The contract between the FHFA and the firm is $9 million for the first year. The FHFA has options to extend for an additional four-and-a-half years. The total contract is not to exceed $45 million. 

Rood added that the two most common concerns about the end of conservatorship of Fannie Mae and Freddie Mac are related to the access of credit and the cost of mortgage credit. He added that GSE’s are “essentially required” by their charters to ensure mortgage credit is available in every market on every day. 

Who the GSEs serve in those markets is in large part the discretion of the FHFA. Director Calabria appears to want to shrink the credit box that the GSEs work within today in an effort to reduce the credit risk that taxpayers are exposed to via the Treasuries current backing of the enterprises' debt and securities, and the future commitment to at least backstop their MBS,” Rood said. 

He added that if private capital or the FHA can’t or won’t fill the credit void left by the GSE’s retraction, home values may suffer. 

“There is a clear bias towards the GSEs being required to hold more credit then their statutory capital requirements and more than the regulatory capital plan proposed by the Obama administration,” Rood said. “Higher capital requirements will likely require higher GFees and loan level credit adjustments to counter the higher cost of capital. Higher costs for GSE guaranteed loans not only reduces the affordability of owning a home, it could impact the size of the MBS market and the appetite of banks to portfolio agency eligible mortgages.”

About Author: Mike Albanese

A graduate of the University of Alabama, Mike Albanese has worked for news publications since 2011 in Texas and Colorado. He has built a portfolio of more than 1,000 articles, covering city government, police and crime, business, sports, and is experienced in crafting engaging features and enterprise pieces. He spent time as the sports editor for the "Pilot Point Post-Signal," and has covered the DFW Metroplex for several years. He has also assisted with sports coverage and editing duties with the "Dallas Morning News" and "Denton Record-Chronicle" over the past several years.
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