When it comes to Fannie Mae/Freddie Mac’s future and the administration’s options for this, the Securities Industry and Financial Markets Association (SIFMA) last week was pushing for a guaranty that could be priced in a manner similar to what is seen in the derivatives market.

"We think it’s going to require a guarantee which the government’s going to have to give and we’re going to have to pay for,” Tim Ryan, president and CEO of the SIFMA. “How do you pay? You can go into the derivatives markets now and buy tail risk. If it’s very, very remote tail risk then you pay ‘X,’ if it is not remote you pay [more]. I would think it would be priced based on the environment in which you’re operating in.

"I think there’ll be a corporate guaranty first and then, …if we did it, it would be catastrophic risk [next],” he added.

SIFMA has long been backing a continuing guaranty and keeping a close eye on how the TBA market could be affected by GSE reform. Its representatives, like Kent Colton, senior fellow at the Harvard University of Joint Studies and a senior advisor to SIFMA, appear to be pulling for the administration’s “option three.” How this option could be structured should be discussed,  a U.S. Treasury representative at the meeting said in answer to a question about it.

But as veteran industry researcher and Amherst Securities Group senior managing director Laurie Goodman noted at the meeting, the options for the GSEs “may morph over time.”

So far she sees reform possibilities as positive for the value of existing agency securities because, for example, they portend “less supply.” If a proposal to reduce the loan limit this fall goes through, Goodman said origination could decline a certain amount. Some other proposals could cut supply as well.

Jeremy “Jay” Diamond, a managing director at Annaly Capital Management, suggested that continued involvement by market participants is necessary in order for GSE reform to take shape.

“This is not the field of dreams where ‘If you build it, they will come,’” he said at the meeting.

In a speech at the meeting, a Treasury representative stressed that it is the private sector that should be mainly responsible for mortgage risk and capital. Jeff Foster, senior policy advisor, capital markets, for the Treasury, said securitization is key and recognizes the private housing finance market for it remains limited.

He said the Treasury recognizes that the options for “winding down” Fannie/Freddie in the administration’s recent report are not enough alone to restore the private-label securitization market without finding a way to restore market participants’ confidence.

But he added that the new Consumer Financial Protection Bureau (CFPB), stronger capital requirements in line with Basel III, transparency, disclosure and risk retention standards in the securitization market as well as national servicing standards, among other things, should work to this end.

When asked about the qualified residential mortgage definition being proposed in conjunction with risk retention standards and its possible effect on credit availability, Foster said, “Risk retention’s ultimately not about limiting credit. It is about aligning incentives and reducing asymmetric information.

“There’s a lot of ways that risk retention in a QRM framework can be structured so that it achieves those objectives without unduly constraining the [availability of credit],” he said, encouraging discussion about how this might be achieved.

Foster indicated the Treasury is aware of the need to maintain the TBA market’s performance and is keeping its eye on how housing finance reform could affect it.

He said while affordability is important, the Treasury is not necessarily working toward a goal where all Americans would be homeowners. “You have to have the financial capacity to own a home to take that step,” he said. He added that rental assistance for those who do not would be a goal.

When asked if there would be targets or goals in terms of interest rates or homeownership Foster said there would not be.

“Homeownership is an important goal…It’s been kind of a gateway for access to the middle class. There are a lot of important benefits but…homeownership’s not necessarily right for everyone and we’re focused on sustainable homeownership.”

The Treasury is keeping its eye on how the huge existing government and agency securities market could be affected by a transition to any new system and will ensure that its obligations could be fulfilled, Foster said. It seeks to preserve borrowers’ rate lock and refinancing options.

He said the Treasury is mindful of the need for the government to continue to support the existing housing finance market that has been reliant on it until it transitions more of its functions to the private market.

“This is an iterative process,” he noted, adding that because it brings the market into “uncharted territory” participants in the process need to be careful in terms of how to attract and bring back private capital into the market alongside government institutions.

"Ultimately there is a triangulation aspect to this,” he said, noting that in terms of sequencing the long process ultimately might not take a linear path as parameters used to price risk, among other things, change.

But over time he is hopeful developments will converge in such a way that bringing more private capital into the housing finance market will be possible.

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