At the American Securitization Forum conference held in Washington D.C. this week, The Future of the GSEs panel speakers called for a well defined and consistent mission for Fannie Mae and Freddie Mac.

They also asked for a clear demarcation line between the private and public sector roles of these agencies. 

They said that these firms’ missions — which include supporting the secondary mortgage market and fostering affordable housing — should be clearly and separately defined. The problem is that what incentivizes investors to buy these securities are the returns or the ability to purchase them on a risk-adjusted basis, which conflict with the affordable housing part of these agencies’ mission.

Underwriting standards were also not up to par, according to panelists, when these agencies delved into subprime loans to boost their affordable housing goals.

The resulting lack of credit quality, panelists said, made paying for access to the government guaranty worth it.

The panel also discussed the essential role of these two agencies in fostering a TBA market — the agencies provide the credit support for this sector. “If we shrink Fannie and Freddie, we will have problems with liquidity because there will be a non-functioning TBA market,” said Garry Cipponeri, senior vice president at JPMorgan Chase. He added that mortgage rates would also increase by 150 basis points without the GSEs and TBAs.

An alternative is to create a new security “that reproduces TBA,” said James Lockhart, vice chairman, WL Ross & Co. and former director Federal Housing Finance Agency.

To foster the type of liquidity that is needed for the TBA market, private sector participation is necessary. A suggestion from the panel was for the four biggest servicers, Chase, Bank of America, Wells Fargo and Citi to possibly create their own conduit.

The chances of all these alternatives happening, however, “always come down to pricing,” said Wellington Denahan-Norris, chief investment officer and chief operating officer at Annaly Capital Management.

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