Recent mortgage finance legislation proposals have highlighted some good solutions toward weaning the mortgage market off the government.
However, the real question is will investors bite once the government steps out of the picture?
Speakers at yesterday's American Securitization Forum's (ASF) Sunset Seminar on private mortgage finance legislation said that for liquid premium rate investors – the underlying investment base of the TBA market – having no government presence will essentially dry up any interest in mortgages.
For the sake of these investors, panelists said it is necessary to find ways to maintain government involvement, but not at the expense of the taxpayer.
However, if some members of Congress had their way, the government will have very little role in supporting the secondary market for mortgages.
Within the last month alone, Congressman Scott Garrett (R-NJ), chairman of the House Financial Services Subcommittee on GSEs and capital markets, as well as Senator Bob Corker (R-TN), ranking member on the Senate Banking Committee Subcommittee on financial institutions and consumer protection, have produced legislation that would wind down Fannie Mae and Freddie Mac and drastically reduce the federal government's involvement in housing finance.
Panelist Mark Willis, resident research fellow at the New York University's (NYU) Furman Center for Real Estate and Urban Planning, said that it is also unlikely that enough investors would be interested in taking positions on 30-year fixed rate mortgages without a government guaranty.
"There are some natural investors and a natural home for 30-year fixed paper – they are pension funds and insurance funds," said Lawrence White, Robert Kavesh professor of economics at NYU. "But the model would have to be a simple senior/subordinate type structure, where the subordinate goes to hedge funds and mutual funds."
However, the problem is that the market might not be deep enough to support the level of the long-term, fixed-rate mortgage market that currently defines the U.S. mortgage market.
Also troubling for private-label mortgage investors are the different government policies, including Home Affordable Modification Program 2.0 (HAMP) modifications. The HAMP, specially its new version, has also created much uncertainty on the future of private-label RMBS.
"There has been a focus on the direct problem of channeling GSEs out but at some point in time we will have to see that companion piece of government policy worked out as well," said Ralph Daloisio, managing director at Natixis, speaking at the ASF event.