NEW YORK--(EON: Enhanced Online News)--Kroll Bond Rating Agency (KBRA) has issued a new report, “Housing Reform 2017: Can the GSEs be Privatized?”, which makes the following key points:
“Housing Reform 2017: Can the GSEs be Privatized?”
- Treasury Secretary designate Steven Mnuchin has opined that the government sponsored entities (GSEs), Fannie Mae and Freddie Mac, should be privatized and taken out of “government ownership.” The comments by Mnuchin suggest that somehow public ownership of the GSEs is preventing mortgage lending, when precisely the opposite is the case.
- The GSEs provide a substantial subsidy to the housing finance market first by using the superior credit standing of the U.S. government to support the sale of securities secured by 1-4 family home loans. The GSEs also act as guarantor for these securities, taking the first loss credit risk on the underlying loans. Finally, the implicit governmental guarantee for the securities issued by the GSEs makes possible a forward, “to be announced”, futures market that allows for the efficient management of interest rate risk.
- KBRA is concerned that many participants in the discussion regarding housing finance reform do not understand that without some degree of governmental support, the market for 30-year mortgages would change dramatically and, in particular, the TBA market would cease to exist.
- 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. In the absence of a TBA market, no coupon would be high enough to support the entire range of demand for mortgage finance. In the event of privatization of the GSEs, private loans will have significantly higher cost for consumers and offer equally more attractive returns for financial institutions and end investors, a result that would generate enormous political opposition among the numerous constituencies in the housing market.
To view the report, please click here.
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About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).