Analysts continue to weigh in on the Johnson-Crapo proposal for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform and its expected long-term impact on capital markets. The Federal Mortgage Insurance Corporation is still years away even if the proposal does become law, but its impact on bond markets could be felt much sooner.
“This bill likely represents the blueprint for US mortgage finance reform,” write Deutsche Bank analysts Steve Abrahams and Chris Helwig in a March 24 report. “The bill is less about ideology than about getting the system engineering right. It broadly works. And that’s why the chances look high for something like Johnson-Crapo becoming law in the long run.”
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Fannie Mae, Freddie Mac reform’s political timeline
Turning the proposal into law by the end of the year will be challenging with an election coming up. The Senate would likely need to pass the bill before the 4th of July so that the House could pass its own legislation (which could be quite different) and the bodies enter conference and start negotiating either in July or September. If the Republicans win control of the Senate this year, they will likely stall until 2015 so that they can negotiate a version that better suits their platform. This would make it easier for the two houses to negotiate, but might make it less likely for President Obama to sign the final bill into law (he has been broadly supportive of Corker-Warner and Johnson-Crapo). Abrahams and Helwig consider passage by 2015YE to be very likely, and passage by 2014YE to be possible.
If Johnson-Crapo were to become law as written, it would mandate six months to get the FMIC up and running. Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and the Federal Housing Finance Agency (FHFA) would all become part of the FMIC at that point. The securitization platform would be incorporated within another six months, and Fannie Mae and Freddie Mac would have to cease all new business within five years of passage. The deadlines can be pushed back with progressively tougher votes (FMIC simple majority, FMIC supermajority, FMIC unanimous vote with Fed Chair and Treasury Secretary consent), but Fannie Mae and Freddie Mac could be completely wound down as early as 2020.
Johnson-Crapo’s impact on other assets
“Prices on US Treasury debt could decline as a result of this legislation due to the contingent source of supply associated with the extension of the full-faith-and-credit guarantee,” write Abrahams and Helwig.
Since there will be at least another $4.4 trillion in full-faith-and-credit assets available to investors, and possibly more than $5 trillion by 2020, investors looking for very low risk investments will have an options as good Treasury bonds. Johnson-Crapo prohibits changes to the existing dividend structure for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), seemingly locking in the controversial income sweeps, but that only confirms that the value of GSE preferred shares will be decided in the courts.