Don’t Replace Fannie Mae And Freddie Mac: WSJ

Don’t Replace Fannie Mae And Freddie Mac: WSJ

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The Johnson – Crapo bill to replace Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with multiple private mortgage bond issuers would only create the same monsters, notes the WSJ editorial.

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The editorial notes Johnson-Crapo’s capital standards, as always, will be gamed or whittled down over time.

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Johnson-Crapo Fannie Mae and Freddie Mac reform bill

Last month, US Senators Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) made a new proposal for reforming the US mortgage industry that falls in line with last year’s proposal from Bob Corker (R., Tenn.) and Mark Warner (D., Va.).

The proposal would set up a system of private companies that release a common security, much like Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) / and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) sell securitized mortgages under the current system.

The Wall Street Journal editorial notes the Senators Johnson and Crapo want to replace Fannie Mae and Freddie Mac with multiple private mortgage bond issuers that would each also have a taxpayer guarantee. Moreover, the supposed reform would require the issuers that get the new guarantees to raise a capital level of 10% against the value of their mortgage loans and would take that much in losses before taxpayers were on the hook.

Hold ‘appropriate’ level of capital

The Wall Street Journal editorial points out that the guarantors won’t have to reach the 10% capital level for a decade and in the interim a new federal mortgage insurer and regulator is supposed to make sure the guarantors hold an ‘appropriate’ level of capital.

Moreover, the bill includes a new 0.1% tax on federally insured mortgages that will be distributed to housing-slush funds across the bureaucracy.

The editorial also points out supporters saying the 10% capital requirement plus the premiums and the new tax could push the cost of issuing a taxpayer-backed mortgage bond high enough to allow private issuers to compete. It also notes Johnson-Crapo ensures that the universe of loans eligible for subsidies will continue to grow. With rising home prices, the new Federal Mortgage Insurance Corporation (FMIC) could raise the size of mortgages eligible for federal insurance, though it would bar the agency from ever lowering the ‘conforming loan’ limit.

The Wall Street Journal editorial suggests the Senate should go back to the drawing board and come up with a reform that doesn’t use the demise of Fannie Mae and Freddie Mac to create a dozen mini-me replacements that could grow to become the same monsters.

As reported earlier, analyst at Compass Point Research in its March report believe that Congressman Hensarling (R-TX) is unlikely to alter the House Fannie Mae and Freddie Mac reform proposal known as the PATH Act. House GOP leadership, much like their Senate counterparts, is likely to avoid the issue of housing reform as well given its aversion to making the rank-and-file take tough votes in an election year. Hence the analyst believes Fannie Mae and Freddie Mac reform will not become law in this Congress and instead view 2015 or 2017 as far likelier dates for legislation to head to the President’s desk.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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