KBRA: Don’t Remove Government Backing from Mortgages

first_img Brian Honea’s writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master’s degree from Amberton University in Garland. Previous: Now That a Real-Estate Developer is President-Elect . . . Next: Confidence in the Economy is Surging Share Save in Daily Dose, Featured, News, Secondary Market Data Provider Black Knight to Acquire Top of Mind 2 days ago Servicers Navigate the Post-Pandemic World 2 days ago About Author: Brian Honea Demand Propels Home Prices Upward 2 days ago Tagged with: GSEs Housing Finance Reform Kroll Bond Ratings Agency Demand Propels Home Prices Upward 2 days ago Home / Daily Dose / KBRA: Don’t Remove Government Backing from Mortgages Governmental Measures Target Expanded Access to Affordable Housing 2 days ago Related Articles The Best Markets For Residential Property Investors 2 days agocenter_img  Print This Post GSEs Housing Finance Reform Kroll Bond Ratings Agency 2017-01-10 Brian Honea The Best Markets For Residential Property Investors 2 days ago Servicers Navigate the Post-Pandemic World 2 days ago Sign up for DS News Daily The Week Ahead: Nearing the Forbearance Exit 2 days ago KBRA: Don’t Remove Government Backing from Mortgages Governmental Measures Target Expanded Access to Affordable Housing 2 days ago Nearly every stakeholder on both sides of the political aisle agrees that the government’s eight-years-long-and-counting conservatorship of Fannie Mae and Freddie Mac should end. They just can’t agree on how it should end.Various theories exist as to the best way to end the conservatorship. Many papers have been published on the topic, and several legislative actions have been proposed in the last few years, though none have gained any significant headway.One school of thought says that privatizing the GSEs would be the best answer, suggested by Treasury Secretary Nominee Steve Mnuchin; another says that the best solution is to liquidate them, as suggested by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). Some have called for the GSEs to be recapitalized and released from conservatorship.Kroll Bond Ratings Agency (KBRA) in a new paper titled “Housing Reform 2017: Can the GSEs Be Privatized?” contends that government backing of securities issued by the GSEs is essential for the existence of a forward “to be announced” market which reduces lenders’ interest rate risk and consumers’ costs.“The privatization of the GSEs implies, in the short term at least, a significant decrease in the financing available to the U.S. housing market,” KBRA Senior Managing Director Christopher Whalen wrote. “In the absence of a TBA market, no coupon would be high enough to support the entire range of demand for mortgage finance, only pockets of higher quality loans as with the jumbo mortgage market today.”The mortgage market in the U.S. is worth approximately $10 trillion, about half of which is held by large commercial banks. Non-banks account for the rest, but they would be marginalized without a TBA market to hedge interest rate risk, according to KBRA.“While privatization may seem desirable in terms of protecting taxpayers, the functional reality is that the GSEs today perform functions that the private markets are unwilling to provide, at least at current levels of mortgage interest rates and equity returns,” Whalen said. “[T]he GSEs take market and credit risk that private investors have so far been unwilling to bear. With respect to the credit risk, today there is no significant market for taking first loss risk on single family mortgages other than prime loans held in portfolio on the balance sheets of depository institutions.”KBRA contends that if the GSEs are privatized, non-banks would be unable to fund the production of residential mortgage loans unless the U.S. adopted the mortgage model used in Denmark, which featurs 100 percent variable rate notes.Unless the U.S. moved to the Danish model with 100% variable rate notes, no nonbank could fund the production of home mortgages efficiently and commercial banks are unlikely to pick up the slack for the reasons discussed above. If non-banks are removed from the mortgage loan equation, commercial banks would be unlikely to move in and take their market share, according to KBRA.Click here to view the complete paper from KBRA. January 10, 2017 1,406 Views Data Provider Black Knight to Acquire Top of Mind 2 days ago Subscribelast_img

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