HousingWireHousingWire
The government-sponsored enterprises (GSEs) have been under the conservatorship of the federal government since the 2008 financial crisis, and for some time now many in the mortgage industry have thought this should end.
But what is the goal of ending the conservatorships for Fannie Mae and Freddie Mac?
GSE reform was up for debate at a panel on Tuesday morning at the Mortgage Bankers Association (MBA)’s Secondary and Capital Markets Conference in Manhattan. And at least one panelist believed there are significant downsides to ending conservatorship.
Libby Cantrill, head of public policy at PIMCO, believes real reform for the GSEs and shrinking the government’s role in housing finance would actually be easier with Freddie and Fannie under conservatorship.
“[PIMCO] would question this fascination and obsession with releasing the GSEs in the first place because we don’t understand what objectives it would actually achieve from a policymaker perspective,” Cantrill said. “In some ways, we think that’s a solution in search of a problem.”
At the heart of the issue for Cantrill is the idea that mortgage-backed securities (MBS) are viewed by some of PIMCO’s clients as interchangeable with U.S. Treasury securities.
If the GSEs are released from conservatorship without an implicit or explicit guarantee from the federal government, it would introduce credit risk into the MBS market. This would make them them less attractive to the type of global investors who have less risk appetite, such as sovereign wealth funds and pension funds.
In turn, this could impact the level of liquidity for MBS pools, which then prompts the question of how to preserve it in the event of significant policy changes around conservatorship..
“There are a lot of good ideas on how we can move to other guarantee formats,” said panelist Scott Ulm, the CEO of ARMOUR Residential REIT. “All of them carry degrees of complication and frankly some uncertainty.
“A keystone of any thinking about it has to be how you preserve that liquidity and preserve the system that we have, and that is probably worth making some compromises.”
The panelists believe the current arrangement for the GSEs works well in a lot of ways, and that any changes — particularly if they’re dramatic — need to be done thoughtfully and deliberately. Releasing the GSEs could complicate the federal government’s ability to act in the event of another systemic financial problem.
The government could make an explicit guarantee of mortgage bonds if the GSEs are released, but it would require congressional action that the panelists think could be difficult given the political environment.
If privatizing the GSEs reduces liquidity, it could also damage the housing market.
“On the liquidity standpoint, that’s just going to mean rising costs to homeowners in the market that’s already stretched,” said Warren Kornfeld of Moody’s Investors Service. “From an affordability standpoint, take what we have and try to address a couple of things but not mess up that liquidity that we have in this very vibrant [mortgage] market.”
