Obama Administration looks to scale back GSE guarantees

Recent reports are describing a desire by the US Treasury and other Government Agencies to try to revive the mortgage-backed market by scaling back the levels of guaranteed debt issued by Fannie Mae and Freddie Mac.

The “theory” behind the so-called Plan B is that the over availability of government guaranteed debt is crowding out any resurgence/recovery of the private mortgage-backed market.

This line of reasoning is not new, as the private market for years had complained about the tilted advantage that the GSE’s had in the market place.  However, we don’t think a scaling back of the government guarantees , whether discreet or implied, is the answer to today’s problem.

Let’s not forget, despite all the complaints coming from the private market for many years, that side of the market did remarkably well, competing side-by-side with Fannie and Freddie for the attention of investors.  The private  market didn’t shrink.  On the contrary, it grew by 20% or more in many years through 2006.  Certainly, we won’t argue with the fact that the GSE’s have a huge advantage in the market but there are probably many good arguments on both sides of the question of whether this a good thing or a bad thing.

No, we believe that there is a much more sinister culprit at work in today’s private market.  However, the good news is that the Treasury, FDIC and SEC should realize that they have the power to fix this problem as well.  We believe the real problem is the continuing confusion among the private MBS investor community for how to judge current and future policies around critical “investor resolution” issues like Safe Harbor.

It’s hard enough for investors to analyze a private market MBS investment without trying to predict if their rights to the cash flows from the underlying loans won’t be superseded by another creditor class (i.e. the FDIC).  How can anyone expect new private market activity to pick up when currently outstanding securities are stuck in Safe Harbor Limbo?

While we do understand that the private market makes a strong case for evening the playing field with the GSE’s, simply cutting back on government guarantees will not bring many private market investors back to the field.  All this will do is slice up a smaller pie (i.e. market) between the GSE’s and the private MBS market.  We much prefer a strategy that looks to make that pie bigger by giving private investors the confidence to return to the market.  Creating a strong set of Safe Harbor polices is the best way to accomplish that.  Restoring the ability of issuers to move MBS programs off balance sheet would be another strong step.

About markferraris
Managing Principal Orchard Street Partners LLC

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