We have finished our analysis of the sweeping new margin rules adopted last week by the federal banking agencies and FHFA. In this report, we assess their impact on the future of the GSEs, concluding that the cost of the margin rules combines with the scope of requisite hedging for mortgage obligations to make it very, very difficult to sustain current market size and practice without the exemption for Fannie and Freddie obligations allowed in conservatorship. Force them out of conservatorship or allow them to go back to their old charters and the exemption evaporates, and the cost of hedging and structuring now backed by agency paper goes way, way up, with particularly challenging implications for mortgage finance. Because FHLBs are not exempt counterparties, the cost of hedging with their obligations does go up.

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