Understandably frustrated by White House and Congressional inaction, the Federal Housing Finance Agency this week proposed its own solution to the GSEs’ conservatorship. Loosely summarized, it’s as follows: kill one GSE, turn the survivor into a securitization platform on which all RMBS rest and throttle guarantee operations with a set of higher fees in hopes that private capital will ride to the rescue. Predictably, FHFA’s proposal is being judged by many based on the ideological predilections that preoccupy the GSE-reform debate. However, here we’ll turn to the threshold
question: regardless of whether or not the FHFA plan is “right” on these policy grounds, could it work in the marketplace and, thus, resuscitate mortgage securitization. For all we applaud FHFA’s hopes, we fear its plan won’t fly.
First to whether or not one could strangle one GSE and leave the other to take on the new tasks FHFA suggests. This, to say the least, isn’t easy. First, under current law, the only way to shut down a GSE is through receivership. This puts it into liquidation and, thus, means that all the shuttered GSE’s debt and MBS holders are on their own. Even if FHFA took out the smaller of the two GSEs, Freddie Mac, doing so could have far-reaching systemic implications, not to mention international ramifications given all the central banks that hold this stuff.
Now, on to FHFA’s new idea: the single securitization platform the surviving GSE would build. FHFA could make the platform happen for GSE securitizations, but it’s far from clear that anyone else would want to use it. The agency’s paper outlining the plan suggests that all government MBS could run through the platform. But, Ginnie Mae is up, running and clearly well able to move FHA paper into the market – paper which, by the way, is subject to separate indemnification and other rules that might force a single platform into separate parts that then contradict its stated purpose. It’s also at best unclear why private issuers would want to run their paper through a single GSE platform. The very largest mortgage originators spent a lot of time and money building their own platforms that meet their own needs, platforms now increasingly subject to SEC, banking-agency and CFPB rules designed to achieve the policy goals FHFA espouses in its single-platform proposal. All large originators would get for deferring to a GSE platform is, we think, the cost of shutting theirs down and the long-term risk of losing any edge they have in what would become a wholly commoditized business.
And, to FHFA’s likely real and, we think, rightful goal: bringing some private capital into the secondary-mortgage market. We applaud the idea, but the lack of a single platform is the least of the private market’s problems. Far more pressing is the ambiguity over the risk-retention rules and the club they would wield if implemented as proposed. Add to this new MSR capital requirements, the capital regime proposed to replace ratings and the many other rules we’ve previously identified as stumbling blocks, and one is forced to conclude that it’s the regulators, not the securitization process per se, that’s doomed revitalized private MBS. Higher GSE fees won’t help here because, absent a fix to these formidable regulatory impediments, all the higher g-fees will do is force still more volume over to the FHA.
But, even if we’re wrong and the regulators aren’t to blame, would a single platform do the trick for private capital? Only if it fails. If FHFA’s idea works as intended and all MBS issuers come to rely on its single platform, then the government will rule mortgage finance by fiat and no other securitization stands a chance. Running mortgages through a single, standard, government-controlled platform is like running cookie dough through a single cutter – they’ll all end up the same. Maybe someone will figure out how to put a chocolate chip in the cookie and charge a bit more for it, but it’s hard to see why they’ll bother to try.