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Mel Watt weighs in on REITs and housing reform at Brookings

Part 2
Mel Watt weighs in on REITs and housing reform at Brookings (Part 2 of 4)

Mel Watt’s strategic housing reform: Maintain, reduce, and build

Strategic goal 1: Maintain

Mel Watt’s first strategic goal is, “Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets.” In other words, the goal is to keep the current HARP and HAMP programs in place and continue to push mortgage servicers to find alternatives to foreclosure. The second part means that Fannie Mae and Freddie Mac will continue to support liquidity in the TBA market, which indirectly lowers mortgage rates to borrowers.

Foreclosures RealtyTracEnlarge Graph

Strategic goal 2: Reduce

Watt’s second goal is, “Reduce taxpayer risk through increasing the role of private capital in the mortgage market.” Right now, the taxpayer bears about 50% of the credit risk in the U.S. housing market and 90% of all new origination. When you consider how much that is in a notional sense, you can see why the government wants to bring back private capital in the mortgage market. While housing reform seems to be stalled in committee, the main idea is to have private capital bear the first 10% of credit risk and then have the government take the rest. Plus, Fannie Mae (FNMA) and Freddie Mac (FMCC) have directives to reduce their portfolios to no more than $250 billion each by 2018.

Strategic goal 3: Build

The third of Watt’s goals is, “Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.” What he’s talking about here is making changes in the current securitization market and allowing private-label securitizers access to the platform. While we don’t really know what it would look like, we have some ideas. First, the Fannie Mae and Freddie Mac TBAs would merge into one TBA. Ginnie Mae I and Ginnie Mae II TBAs would probably merge as well. Finally, transparency in TBA trading would undoubtedly be increased, with the goal of more electronic trading.

More transparency in TBA pricing would benefit mortgage originators like PennyMac (PMT), Redwood Trust (RWT), and Stonegate (SGM), which use TBAs to hedge their pipelines. The increased focus on foreclosure prevention could mean negative things for non-bank servicers like Nationstar (NSM) and Ocwen (OCN).

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