Fannie, Freddie reform outlook shifts as Pulte takes on new role

Bill Pulte's new intelligence role is reshaping expectations for reform of Fannie Mae and Freddie Mac, industry experts said Wednesday. 

Experts on the panel focused in part on the precedent set by the government sponsored enterprises' mortgage-backed securities buying, and addressed audience questions about the implications of their oversight chief's new acting role.

Fannie Mae and Freddie Mac's MBS buying has largely supported the securitized market so far but questions around how much has occurred so far and what precedent it will set do introduce some uncertainty, said Barath Sankaran, portfolio manager, mortgages, at Loomis Sayles.

"I think there needs to be some clarity," Sankaran said.

When asked about the implications of GSE oversight chief Bill Pulte's new role as acting director of national intelligence, panelists said while it divides the attention he previously focused on Fannie Mae and Freddie Mac, it adds to his political clout, which could make reform more likely.

"I would not assume things would slow down," said Sam Valverde, a nonresident fellow at Urban Institute's Housing Finance Policy Center. Valverde also previously served as vice president of industry engagement at Freddie Mac and acting president of Ginnie Mae.

GSE share prices, however, were continuing to drift lower at the time of this writing Wednesday afternoon, with Fannie down over 8% on the trading day at $6.47 and Freddie down around 5.5% at $5.84. This suggests Pulte's new role makes a new GSE stock offering less likely.

"The market appears to be pricing on the negative read (delay/distraction)," Michael Piccolo and Henry Coffey, analysts at Wedbush, said in a recent flash note. 

While the panelists at the IMN/Informa conference largely agreed with analysts that status quo for the enterprises is likely through the midterm elections, some said President Trump could remain intent on monetizing the GSEs through a conservatorship stock offering during his term.

When asked what aspect of GSE reform might be underrecognized now but potentially take on more importance in hindsight in the future, Sankaran noted that such an offering could well be the answer to that question and potentially be a "monumental event" leading to an eventual exit.

Valverde said the Trump administration has been reframing how Fannie and Freddie support affordability, shifting focus toward middle-class and workforce housing. That change, and its effect on the collateral mix, could prove more significant in hindsight than it appears now, he said.  

Manufactured housing and other innovations in homebuilding could be part of that, panelists said.

While GSE reform has been reframed multiple times by different administrations, how the enterprises support affordability, the status of their structure, and how they provide operational support to the MBS market have been three constant elements, Sankaran noted. 

Panelists had some mixed perspectives around how strong the GSEs' credit risk transfer market is.

Harris Trifon, partner and portfolio manager at Lord Abbett, noted that there have been tender offers and reductions in issuance. Sankaran said CRT continues to have a strong position in the market as a sort of "litmus test" for where guarantee fees should be.

Valverde also said he views credit risk transfers as having become a necessary part of the mortgage market.

"CRT is here to stay," he said.