Tuesday, February 08, 2011

Chairman Garrett Calls for Prompt Reform of GSEs While Preserving Vital Securitization

Rep. Scott Garrett (R-NJ) has called for the prompt reform of Fannie Mae and Freddie Mac along the lines of what he calls the Cantor Rules after House Majority Leader Eric Cantor (R-VA). This would be a reform that increases transparency and decreases government exposure. In remarks at the American Securitization Forum, he said that these should be goals in initial decisions regarding GSE reform legislation. Rep. Garrett is Chair of the House Subcommittee on Capital Markets. Full House Committee Chair Spencer Bachus (R-ALA) strongly supports GSE reform legislation.

The first area to address is their portfolios.The combined retained portfolios of Fannie and Freddie are roughly $1.5 trillion. Through the earlier conservatorship agreement, the portfolios are set to decrease by a small percentage each year until they reach a certain set level. Chairman Garrett wants this to happen faster.

One of the risks associated with a $1.5 trillion mortgage book is it contains a significant amount of interest rate risk. As we begin to eventually head into a more volatile interest rate environment, he reasoned, it will become increasingly difficult to hedge a book that size against those movements. He also believes that there are significant unrealized gains in the portfolios that could be realized.

If you look more specifically at the GSEs’ book, he noted, half of it is actual agency mortgage-backed securities, another quarter of it is non-agency mortgage-backed securities, and the rest of the balance includes mortgage loans of all different types.

Some of the assets can be sold off more quickly; he said, others cannot because they are less liquid. The GSEs own different assets and there are specific markets for each of these assets. Congress will closely look at each of the portfolio components and figure out how to wind them down sooner to protect taxpayers.

Comparing what the government has done with Fannie and Freddie to what the FDIC would traditionally do when it takes over a bank, there is a wide discrepancy. The FDIC would normally come in and gain control of the assets and then get rid of them. If the FDIC had taken over the GSEs, he emphasized, they’d be liquidated.

It is also imperative to be completely honest and transparent with taxpayers and put both entities on the federal government’s budget. Currently, the federal government explicitly stands behind all of their securities and debt issuances, he said, and it is thus important to properly account for it.

Also, if the two entities are truly on-budget, he said, those increased budgetary pressures will force Congress and the Administration to deal with them and not let them continue on existing in perpetuity.

The Chairman believes securitization will play an integral part in, and be vital to, the resurrection of the U.S. mortgage market. Indeed, there cannot be a mortgage market of this size without securitization, which, if done correctly and with the proper incentives, can be a very significant part of the cure.

The securitization process, at its core, allows capital to flow more efficiently and effectively from investors to borrowers across the country and even across the world.
Because the securitization process is so vital to the movement of capital, Congress needs to ensure we have a viable and sustainable housing finance system for the future.