Capitol Hill is buzzing with the news of a new program that would facilitate and accelerate the redirection of private investments into the U.S. mortgage industry. The potential moves from the Obama administration and federal housing regulators represent a transition from a mortgage-backed securities market that is largely controlled by the government sponsored enterprises.[IMAGE]
A pilot program is in the works, and talk in Washington, D.C., indicates that as early as 2012, ""Fannie Mae"":www.fanniemae.com/ and ""Freddie Mac"":www.freddiemac.com/ would initiate the sale of certain securities or portions of those securities to targeted investors. Specifically, the sell off would eliminate a federal guarantee while going after investors paying an elevated interest rate that falls above the current average amount incurred for mortgage-backed bonds.
Seen as a way to test the private investment market for depth and interest as the government grapples with ways to reduce the role of the GSEs in the country's housing sector, the trial program would determine the amount of risk private entities are willing to take on by sharing home loan funding with Fannie and Freddie. Anonymous sources speaking to the _Wall Street Journal_ noted that the new offerings would most likely entail selling between 5 and 10 percent of a bond issued by the GSEs without a federal guarantee.
Private investors purchasing the securities would be placed in the so-called ""first loss"" ranks, meaning they would be exposed to greater risk yet receive elevated interest rates. The resuscitation of private capital for the nation's mortgage market, which eclipsed the government's share pre-crisis in 2005 but disappeared after the housing bubble burst, is an active step toward relieving the GSEs of their major domination of the market, which stands at nearly 70 percent to date.
The Obama administration announced plans in February to begin such maneuvers, but a lack of interest from Congress stalled the legislation process, which is subject to approval from the governing body. Utilizing a pilot program would remove the need to await Congressional cooperation, since only the ""Federal Housing Finance Agency"":www.fhfa.gov/ would need to grant its progress.
Notably, the FHFA's acting director, Edward DeMarco, stated in a September speech that plans to launch this type of securities sale was possible; he went on to say that there are ""numerous securities structures that could be considered."" DeMarco went on to openly comment on the lack of movement since the 2008 announcement that the FHFA would work toward drastically reducing or eliminating the GSEs position in the U.S. housing market.
DeMarco itemized the FHFA's plans for the near future, indicating that the GSEs would continue to raise guarantee fees and would likely begin applying changes such as cross subsidization, geographic pricing differentials, and pricing across lenders. Elaborating on plans encompassing the private investment sector, DeMarco said, ""A traditional way that the Enterprises shared risk with the private sector was through the use of private mortgage insurance. The law has long required that the Enterprises obtain some form of credit enhancement on mortgages with loan-to-value ratios greater than 80 percent. Most often the Enterprises meet this requirement through private mortgage insurance, and the Enterprises often require deeper mortgage insurance coverage than strictly required by law. Consideration could be given to requiring greater mortgage insurance coverage, but doing so would need to be weighed against the financial condition of individual mortgage insurers.""
However, more recently, Freddie Mac's chief executive Charles Haldeman stated that the pilot program was still in the early phases of development. Haldeman's speech during the ""Mortgage Bankers Association's"":www.mbaa.org/ October conference in Chicago, Illinois, created some doubt as to whether the speedy timeline for a trial run would be feasible, especially since the majority of efforts to alter the structure of the GSEs have consistently lagged behind.
Should the pilot programming become successful enough to demand expansion and official legislation, those purchasing homes in the U.S. would almost definitely see a rise in mortgage rates versus the low percentages currently in place thanks to the Fed. Still, many on Capitol Hill see reducing the $10.4 trillion wrapped up in the GSE-controlled mortgage market as critical to the nation's continued economic recovery.