With the administration supposedly set to come out with its GSE reform package on Friday, panelists at ASF 2011 held in Orlando this week were hopeful that the government will offer at least some short-term alternatives to reduce its involvement in the MBS sector, even if an actual proposal is not forthcoming.
Even a not-so-definitive stance from the government will allow private-label mortgage participants to somewhat define their business model.
For instance, allowing the conforming limits to come down to $625 thousand will be akin to sending up a trial balloon for the market, according to Ryan Stark, director at Deutsche Bank Securities. This will, he said, at least begin to define what is non-agency and what qualifies as an agency mortgage. Without such a demarcation, the private-label mortgage market cannot make a comeback.
Armando Falcon, chairman and CEO of Falcon Capital Advisors, said that four questions should be asked before making a decision about the fate of the GSEs.
These questions are: Do we want to subsidize the mortgage, if so by how much?; Who do we want to subsidize — which income range or economic area or should it be limited to first-time homeowners? What form of subsidy should be provided — a loan guaranty, a direct loan similar to student lending, an implicit or an interest-rate subsidy, down payment assistance or even a combination of all the above?; How do we administer the subsidy — will it be through a government program from Ginnie Mae or the Federal Housing Administration or through the GSEs?; Are some forms of GSEs permissible while others are not such as a cooperative type of agency?
Falcon said that once a government policy is established then other questions will be much easier to answer, including defining what a qualified residential mortgage or QRM is.
“There should be a credible transition to get to point B,” Falcon said. This will allow minimal disruption and reduce start-up costs. He added that there should also be “a sunset” where a review is done to determine whether to continue with the current system or make some changes.
The worst case, according to Falcon, is for the GSEs to continue in conservatorship, which will be a burden to the taxpayer.
A transitional solution suggested by James Lockhart, vice chairman at WL Ross & Co, is an RMBS that will phase out in five years. This mortgage will have standard payment and other terms; clear rules for servicers and trustees; greater transparency on underlying mortgages; a 20% down payment or a 10% down payment with 20% mortgage insurance; skin in the game; slowly reduce conforming loan limits; government insurance for catastrophic events after down payments, mortgage insurance, skin in the game and investor deductables are applied.