Mortgage spreads were out only half a basis point last week, pointing towards a rather muted reaction to further GSE criticism emanating from Rep. Richard Baker (R., La.) and Federal Reserve Board chairman Alan Greenspan.
Last week Baker released another letter by Greenspan that reiterates his concerns about the credit subsidies that Fannie Mae, Freddie Mac and the Federal Home Loan Banks enjoy.
"The extent to which the subsidy is exploited is determined by the extent to which (the lenders) choose to issue debt and mortgage-backed securities, and not by legislation," he added in the Aug. 25 letter to the head of the House Banking subcommittee that is studying the issue of regulatory reform for the nation's secondary mortgage market.
"Since these implicit subsidies have important consequences for the structure and efficiency of the markets and the productive allocation of real resources, it is appropriate for them to be subject to the Congressional oversight process," Greenspan said.
As chairman of the House Banking subcommittee on capital markets, securities and GSEs, Rep. Baker is preparing to conduct a roundtable discussion about the bill (H.R. 3703) on Sept. 12.
The Fed chairman has pointed out that the more debt the GSEs issue, the bigger subsidy they receive, Rep. Baker noted.
However, the MBS market reacted to the retread debate with more of an eye-roll than any serious concern.
"Greenspan always felt this way, so it is not really a surprise," said Art Frank, head of MBS research at Nomura Securities. "He is a pure free-market economist. So clearly Fannie and Freddie's charter doesn't fit with that view. But he cannot unilaterally change the regulatory scheme...So I don't see it happening this year."
Frank pointed out that Congress, which has just gone back in session, hopes to adjourn by early to mid October so that they can campaign for the November election. Additionally, Congress is dealing with approximately 11 appropriations bill, as well the issue of prescription drug benefits, so the GSE debt is "at best a third-tier issue," Frank noted.
"If we see some headlines that widen agency spreads two to three basis points, that's a buying opportunity."