Senate Bipartisan Proposal on Housing Reform Expected to Have Little to
No Impact on the TBA Market and Relative Value Strategies
On Tuesday the Senate Banking Committee (Chairs
Johnson & Crapo) announced a bipartisan agreement on broad principles for
housing finance reform as it pertains to the wind down of Fannie Mae and
Freddie Mac. They expect to have a working proposal in the next few days. However, it is unclear whether the House will
act this year on a similar bill even if the Senate does ratify such a
proposal. Furthermore, the Senate didn’t
suggest how existing shareholders in the GSEs would be affected. Nevertheless, the stock market response for
GSE equity holders has been swift and dramatic, with share prices of both
entities down almost 40% since the announcement.
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| Freddie Mac Equity |
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| Fannie Mae Equity |
The reaction in the debt markets
for Agency MBS and the TBA market could not have been more different than that
of the equity market. Iin fact, it was
essentially a non-event. In particular, the
“Mortgage Basis” – defined as the yield spread between MBS and Treasury
securities – widened about +1 bp on Tuesday with most of that movement
occurring prior to the announcement.
This is a welcome development for
traders in the most liquid of mortgage strategies. Market participants had been expecting that
any housing policy reform would leave TBAs largely unaffected. And indeed, Tuesday’s announcement confirmed
that view.
This is not to say that the
announcement was not noteworthy to participants in the housing markets, which
includes just about everyone. To
summarize, the broad principles were:
- Protect taxpayers for future housing downturns
- Promote stable, liquid and efficient mortgage markets
- Ensure affordable 30-year fixed rate, prepayable mortgages
- Provide equal access to mortgage capital for all lenders, large and small
- Facilitate availability of mortgage credit to all eligible borrowers
To meet these objectives, several
details have been agreed upon that will form the basis of the Johnson-Crapo
proposal:
- Continue with the wind down of Fannie Mae and Freddie Mac
- Promote a new system based on private capital absorbing the first 10% of losses on mortgage securities
- Create the Federal Mortgage Insurance Corporation (“FMIC”), funded by 10bps of insurance premiums on every guaranteed mortgage to absorb losses in excess of 10%
- Require strong underwriting standards
We continue to believe that the pending
re-invention of the government-guaranteed mortgage market will present a myriad
of opportunities in mortgage credit trading and in mortgage insurance companies. However, Tuesday’s development also confirms
that opportunities in the most liquid strategies within the mortgage market
will be largely unaffected.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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