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Industry Leaders Caution Lawmakers on TBA Market Reform

Reforming GSEs ""Fannie Mae"":http://www.fanniemae.com/kb/index?page=home and ""Freddie Mac"":http://www.freddiemac.com/ without anticipating changes from new limits to government-backed mortgages could make the fixed-rate mortgage a less available product, witnesses advised lawmakers at a ""Senate Banking Committee"":http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=9fea83c0-384a-4e9e-8a09-b6d026f25e31 hearing Wednesday. Senators arranged the hearing to review reform efforts aimed at extremely liquid mortgage-backed securities, otherwise known as the to-be-announced (TBA) market.

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""As we├â┬ó├óÔÇÜ┬¼├é┬ª explore various approaches to reforming the housing system, it is critically important to understand how any reforms would impact the TBA market,"" ""Sen. Jack Reed"":http://reed.senate.gov/ (R-Rhode Island) opened the hearing by reading from a prepared statement. ""What characteristics of this market, if any, should be preserved? This is a very vitally important part of our securitizations and mortgage industry.""

In ""testimony"":http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=9fea83c0-384a-4e9e-8a09-b6d026f25e31&Witness_ID=8fa6d806-7acb-4740-89ba-d40c9ec8ca1a before the committee, Andrew Davidson, president of ""Andrew Davidson & Co, Inc.,"":http://www.ad-co.com/ said that a colleague called the TBA market a ""national treasure"" and went on to outline risks from reforms.

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""The TBA market helps lower mortgage rates, facilitates rate locks for borrowers seeking to buy homes and has helped the make mortgages available through the financial crisis,"" he said. ""Policy alternatives to the GSEs may enhance or disrupt this market.""

Davidson defended the market by describing it as a way for fixed-rate mortgage originators to prepare for price risks with fluctuating interest rates over the lifespan of a mortgage-backed security. He also said that securitizations from the TBA market keep prices low for investors selling sizeable transactions.

He also argued against proposals that would break up the two GSEs into 15 or more institutions, crediting Fannie and Freddie for their collaboration with lenders and servicers.

""The reality is that that this current outsized role of the government is not sustainable over the long term, and should be reduced,"" Thomas Hamilton, managing director of ""Barclays Capital"":http://www.barcap.com/, referred to federal conservatorship of the GSEs in ""testimony"":http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=9fea83c0-384a-4e9e-8a09-b6d026f25e31&Witness_ID=8ec0c567-5076-4f9f-865c-e5c7332f0977. ""The TBA market's role, and the government's role, should shrink as the private markets regenerate over time.""

According to Hamilton, some $4 trillion bonds are currently acceptable under TBA trade conditions, reflecting a sphere of considerable liquidity in the market. A ""Federal Reserve"":http://www.federalreserve.gov/ ""report"":http://www.ny.frb.org/research/staff_reports/sr468.pdf released in August 2010 held that daily trading volume stood at some $300 billion on a daily basis over the past three years, with Hamilton saying that some estimates put the amount above $600 billion.

If Congress enacts the wrong reforms, Hamilton said, ""[m]ortgage credit would be less available and the credit availability that you would be able to access would be at a significantly higher price,"" creating a ""significant impact on the housing market.""

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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