Fannie Mae-No Politics (FNMA)

[navycmdr]

this is why we stopped the Bleeding today ....

Fannie and Freddie aren't broken, so stop tinkering, PIMCO tells Congress

"Reform could be simple -- and eminently doable," the Pimco executives wrote.
"We think policymakers should ask themselves why they are so intent on fixing
what is clearly not broken. Indeed, with a few tweaks, we believe policymakers
could thoughtfully and slowly shrink the government balance sheet and revive
the private mortgage market -- all while ensuring they don't disrupt one of the
most functional markets in the world."

10:20 am ET February 21, 2018 (MarketWatch) ... By Andrea Riquier

Congress should learn to stop worrying and love Fannie and Freddie, bond manager urges

Ever since the frantic days of the 2008 financial crisis, when Fannie Mae and Freddie Mac were rushed into government control to prevent the collapse of the housing finance system, the question of how to get them out -- and what to do with them next -- has consumed lawmakers and housing industry participants.

But ten years and countless failed attempts later, one of the industry's most important players thinks all the fuss should stop now.

Read:Fannie and Freddie are nearly out of money and Washington is getting anxious (http://www.marketwatch.com/story/fannie-and-freddie-are-nearly-out-of-money-and-washington-is-getting-anxious-2017-05-11)

"We believe GSE 'reform' should simply formalize the current state of affairs -- namely, by making the government guarantee explicit and otherwise keeping Fannie(FNMA) and Freddie (FMCC) functioning as they largely are today. In other words, Congress should be honest about conservatorship: It has been and continues to be immensely successful, not to mention wildly profitable, and the current system works."

That somewhat radical statement comes from Pimco, the mammoth asset manager which calls itself one of the largest players in the market for mortgage-backed securities.

(It's worth noting that housing-watchers have voiced similar ideas: "it's not fixed but it's not broken," Moody's Analytics Chief Economist Mark Zandi told MarketWatch (http://www.marketwatch.com/story/fannie-mae-to-turn-to-taxpayers-after-65-billion-loss-2018-02-14) earlier in February.)

A team of four Pimco executives wrote (https://www.pimco.com/en-us/insights/viewpoints/viewpoints/us-housing-finance-reform-why-fix-what-isnt-broken?) that they had until now refrained from taking a position as various proposals have been advanced, despite having a "keen interest" in the topic.

The future housing finance system should adhere to several principles, they add, including an explicit government guarantee for the bonds created from home loans, risk-sharing between private participants and the quasi-governmental enterprises, and a "national mortgage rate" -- meaning access to the same rate marketplace for all borrowers, regardless of geography.

Those concepts are not generally controversial, although earlier proposals have included other elements, such as the importance of the 30-year fixed-rate mortgage. But while most reform recommendations have struggled to fit those ideas into a new structure, Pimco urges policymakers to leave well enough alone.

"The delivery of mortgage credit has never been so efficient or so fair, nor has the market for MBS ever been so deep, liquid and stable as it has been during the years that Fannie and Freddie have been under conservatorship," the Pimco team wrote.

Even better, this has been accomplished even as the two enterprises have transitioned to a much safer business model, one that protects taxpayers, they note.

Read:Congress wouldn't do it, so Fannie and Freddie reformed themselves (http://www.marketwatch.com/story/congress-wouldnt-do-it-so-fannie-and-freddie-reformed-themselves-2017-08-03)

The executives didn't explain why they decided to break their silence, but the question of what to do with Fannie, Freddie, and the "future state" of housing finance has been discussed a lot recently. In 2012, Congress directed the two enterprises to start remitting progressively larger chunks of their capital to the Treasury, ultimately winding up with zero by the start of 2018. That outcome, which would leave the companies open to "headline risk" of having to take a "taxpayer bailout" was considered so dangerous that it would surely spur lawmakers to set aside their differences and reach an agreement before it happened, it was believed.

Yet Congress still couldn't reach an agreement. Late last year, the 2012 directive was amended to allow both enterprises to hold a small capital buffer, and yet both had to draw on their Treasury lines of credit this winter anyway.

Many housing industry analysts have argued that the mortgage market's stability in the face of so much jockeying by legislators and uncertainty about the future shows that investors will remain patient while Congress comes up with a fix.

But Pimco argues not only that Congress need not find a fix, but also that investors would be a lot happier -- and happier to help -- if lawmakers just accepted the status quo, with a few tweaks that would make it easier for private bondholders to return to the market. "Policymakers should slowly reduce the government footprint by carefully and deliberately lowering loan limits and ultimately tying them to median incomes, rather than to housing prices" at the same time, they add.

Many lawmakers who are uncomfortable with having the government play such a large role in the housing market would prefer that the "private-label securities market" be revitalized. New mortgages written for the private market made up less than 1% of all home loans last year, according to data from the Urban Institute (https://www.urban.org/sites/default/files/publication/95981/housing_finance_at_a_glance_a_monthly_chartbook_january_2018_1.pdf).

"Reform could be simple -- and eminently doable," the Pimco executives wrote. "We think policymakers should ask themselves why they are so intent on fixing what is clearly not broken. Indeed, with a few tweaks, we believe policymakers could thoughtfully and slowly shrink the government balance sheet and revive the private mortgage market -- all while ensuring they don't disrupt one of the most functional markets in the world."

-Andrea Riquier; 415-439-6400; [e-mail]

(END) Dow Jones Newswires

February 21, 2018 10:20 ET (15:20 GMT)

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