Don’t count on US Congress acting on housing finance reform in 2014, according to a research note from UBS

The UBS Global Research note says the differences between the Senate and House bill are so significant and the limited available time before the mid-term elections are factors that suggest reform is more of a long-term issue.

The report concluded US housing reform is “likely not a game changer for financial stocks.”  Outside of homebuilders, mortgage REITs and private mortgage insurers, most groups within the financial service sector should see little impact, the report noted.

Fannie Mae Freddie Mac

Winning and losing investments

Investors looking to capitalize on housing reform might do well to look at specific mortgage REITs, with Redwood Trust, Inc. (NYSE:RWT) in the best position to leverage Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform, the report noted. The reports suggests reform represents modest positives for regional banks and a modest negative for large correspondent lenders, the report said, specifically citing Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) while The Bank of New York Mellon Corporation (NYSE:BK) would likely see a benefit from increased securitization activity if a public housing backstop included strict rules. Homebuilders might also be negatively impacted, with Key Call PulteGroup (PHM) being the least impacted due to their strong position in the active adult market segment.

Insurance industry implications

For the insurance industry, the report says there will be several implications of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform.  Demand for private mortgage insurance will remain strong, and demand for securitization will remain and insurers will participate in providing a 10% first-loss protection program. Insurers will continue to participate in risk sharing reinsurance of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) assets and reinsurance of private mortgage insurance risk management, according to the report.  The report highlights Arch Capital Group Ltd. (NASDAQ:ACGL) and Genworth Financial Inc (NYSE:GNW) as the most exposed to Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform.

Goals of Johnson-Crapo:  Fannie Mae, Freddie Mac

After discussing winners and losers, the UBS report tackles the challenging of explaining the implications of the reform now tabled Johnson-Crapo Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform bill. The goal of the bill is to wind down Fannie Mae and Freddie Mac, which guarantee over 50% of the $10 trillion in US mortgage loans.  The bill proposes a new federal agency, Federal Mortgage Insurance Corporation (FMIC) to replace the Federal Housing Finance Agency (FHFA). The goal is to “protect taxpayers” from finding themselves on the hook for the cost of a housing downturn by creating a first loss position and creating a mortgage insurance fund within the FMIC. A second goal is to build and smoothly transition to a secondary market to sell securitized product. While the goal is to “protect taxpayers,” the bill calls for the placement of an explicit government backstop risk guarantee on the FMIC-wrapped securitization, which will assist in selling the product in the secondary market.