Fannie Mae, Freddie Mac: MBIA Could See Opportunities Amid Changes

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BTIG analyst Mark Palmer uses his analytical powers to predict the effects of the housing finance market evolution.

Buy-rated MBIA Inc. (NYSE:MBI) CEO Jay Brown has on a few occasions discussed how a new structured product insurance effort could fit into the company’s future plans. That concept was again the subject of discussion last week when we spoke with Brown at MBI’s headquarters last week. While the CEO said he was open to writing virtually all kinds of structured product insurance – except derivatives, that is – he specifically said that he would not be averse to wrapping housing-related instruments.

“I think you get the best opportunities when an area is going through change,” Brown said. “I think residential real estate will go through massive changes in the next 4-5 years.”

While Brown did not get into specifics, investors were given food for thought yesterday regarding the kinds of opportunities that MBI could see as the post-crisis housing market continues to evolve.

Senate Banking Committee to wind down Fannie Mae and Freddie Mac

Senate Banking Committee Chairman Tim Johnson (D-SD), and Ranking Member Mike Crapo (R-ID) after months of deliberation yesterday released a preliminary plan that would wind down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) while maintaining government backing of mortgages. The bill builds upon the architecture of the proposal floated last year (S.1217) by Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA). And we believe it was essentially the kind of approach that Johnson and Crapo suggested – one similar to that proposed by Rep. Jeb Hensarling (R-TX) and separately by a trio of Democrats in the House of Representatives – to which Brown was referring.

Sens. Johnson and Crapo expect to release the plan’s legislative text in the next few days, but they provided an outline yesterday. Importantly from MBI’s perspective, one part of the plan involved the creation of “a member-owned securitization platform that will issue a single, standardized FMIC-wrapped security, and permit private label securities to be issued in a manner that encourages standardization and improved market liquidity.”

Johnson-Crapo could be a boon for mortgage insurers, but it also could create a significant opportunity for MBIA Inc. (NYSE:MBI). The text of the Corker-Warner plan included a section outlining specific criteria for government approval of bond guarantors that would be permitted to wrap securitizations.

While the Senate Banking Committee is expected to markup and then vote on Johnson-Crapo in the next few weeks, it is unlikely that the plan will be passed before the midterm elections in November. But the potential timing of the bill’s passage appears to dovetail well with MBI’s thinking regarding the timeframe for the launch of a new structured product insurance business.

“We would say that if we’re looking forward, the area we’re looking at most closely now over probably the next 12 months or 18 months – and again this is not something we will turn our eyes to until National is up and running – is obviously the trillion-plus mortgage market, ” Brown said during MBIA Inc. (NYSE:MBI)’s 4Q13 conference call. “We think as that market restructures with the combination of what’s going on with the banks and what they’re going to be able to keep on balance sheet, with what we perceived the government will eventually have to do with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), we think there is going to be a role out there for three or four monoline guarantors.”

Brown said during our meeting last week that there are investors prepared to provide capital to support the creation of a new structured product insurance business.

Affordable mortgages might be reduced in the absence of Fannie Mae, Freddie Mac

Some critics have scoffed at plans to unwind Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) given their belief that the availability of affordable mortgages would be significantly reduced in the absence of Fannie Mae and Freddie Mac. However, the effort has attracted bipartisan support in both houses of Congress as well as the White House and some leading business groups.

“We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform,” the White House said in a statement.

We noted in a blog post on January 13 that The Economist had reported on signs of a revival in the securitization market. The passage of housing finance legislation such as Johnson-Crapo would represent a giant leap forward in that regard, and we believe MBI will be well positioned to play an important role in these developments while in the process establishing a new driver of book value.

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