By Ramsey Su
Happy president (from the article linked above – Photo via AP)
In all fairness, I have not seen or read a trace of detail as to how this is going to happen. I am also personally totally in favor of eliminating the two dinosaurs. However, it has been five years since the two agencies went down and not a single plan has been put in place to privatize the mortgage industry. In fact, between the Treasury as conservator and the Federal Reserve, the real estate mortgage business has been nationalized. To think that these two agencies can be eliminated – good luck.
Maybe the White House has it all planned. Here are a few questions that I hope they have answers for:
1. About 50% of all outstanding mortgages are agency loans. What is going to happen to these loans?
2. Bernanke is buying $45 billion of agency loans per month. That is more than all purchase loan originations. Will the Fed be able to purchase private label MBS? If not, then the Federal Reserve has just been taken out of the real estate picture.
3. Who is going to insure these loans in the same manner that the agencies are doing today, with the backing of the US Treasury? Has anyone tried to price this insurance?
4. For all practical purposes, there is no private label MBS market today. Has anyone tried to test the market with a pool of credit enhanced, high LTV, mediocre credit and so-so DTI loans? What if the market demands a few hundred basis points extra for this unproven product?
5. What type of protection will loan originators have if they are not selling loans to Freddie and Fannie using their guidelines?
There are many more questions, but it would be beating a dead horse. The details are not minor. Neglecting them may topple the whole market. As much as I dislike the current system, the participation of Bernanke and the guarantee by the Treasury are keeping mortgage rates at current level. The conduit is Freddie Mac and Fannie Mae. It they are to be eliminated, I opine that rates can easily go up a couple of percent.
Obama, be careful, you are playing with fire.
Traders in FNMA's shares remain oddly hopeful via BigCharts.