Don’t Expect the GSEs to Go Away Anytime Soon

CNBC Reports…

Fannie, Freddie Cannot Exist in Current Form: Frank

Rep. Barney Frank (D-Ma.), chairman of the House Financial Services Committee, said Friday that Fannie Mae and Freddie Mac should be eliminated as they stand now.

“This committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance, that's the approach rather than the piecemeal one,” Frank said.

Frank made his comments during the committee's hearings on executive compensation.

A statement to CNBC.com from a senior congressional staff person said that Frank has said in the past that the current structure of Fannie and Freddie cannot exist and that in Frank's words, 'we cannot go back to the private entity with public responsibilities.'

The White House has said it plans to release a proposal for what to do with the two firms later this year.

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If this does happen, it won't be any time soon, especially if the Fed is to exit the MBS market in March.

The GSEs and Ginnie Mae (very efficient operation) will be a critical source of liquidity in the secondary mortgage market when the Fed's MBS funding runs dry. Unfortunately, while Ginnie and FHA can handle the meager amount of loan supply that is currently being produced in the TBA MBS market, the GSEs will still be needed as a source of support. This will require a some form of guarantee to be put on the GSEs (agency debt or MBS), whether or not its explicit for the next five years or implicit for the next forever is up for debate.  The Christmas Eve present offered to the GSEs by the Treasury does offer a hint that we should expect to see the GSEs in operation for the time being….it also implies the GSE reform process will be not be short.

For those who say housing is doomed if the Fed exits, I disagree. There is no better time to exit the mortgage market than when the housing market is producing minimal loan supply. So who supports the market?

GNMA paper is already explicitly guaranteed, expect GNMA and the FHA to continue to be a crutch (responsibly). In terms of GSE paper, while I still believe the guarantee needs to be clarified (perhaps explicit for the next 5 years?), banks have proven they are ready and willing to provide demand side support for FN/FRE loan sellers. Barring any major political (yikes bank reform) or monetary policy changes this is expected to continue into 2010.

We can do this without the Fed, we cant do it without the GSEs, Ginnie, and the FHA.

Looking further ahead, I do see it possible that one of the GSEs would become a “bad bank”. Freddie has much better technology than Fannie but Fannie is considered to be the smarter enterprise. My nod goes to Freddie if I had to choose one to sell loans to…

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