A SHOCK TO THE SYSTEMIC:
NEW STANDARDS FOR THE SECONDARY MORTGAGE MARKET
Systemic standards for institutions and activities across the U.S. secondary mortgage market will determine winners and losers for the foreseeable future.
The analytics below are based on in-depth reports provided to FedFin clients.
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On July 14, the Financial Stability Oversight Council (FSOC) chaired by Treasury Secretary Mnuchin announced a systemic review of the secondary mortgage market. Zero details were provided about who or what will be reviewed, but a statement at the same time from the head of the Federal Housing Finance Agency (FHFA) signaled a structural overhaul that might well redefine not just Fannie Mae and Freddie Mac, but also key mortgage-market providers and products. Karen Petrou’s client memo on this game-changer illustrates the complexities of this new construct along with its strategic impact.
FSOC’s deliberations will follow the course laid out in the systemic standards FSOC issued late last year. These shift from the Obama Administration’s process of designating specific nonbanking companies as systemically-important financial institutions (SIFIs) to the activity-and-practice option. FSOC has tried this only once on money-market funds with, from its perspective and that of the Fed, very mixed results. Now, as FSOC has reconstituted activity-and-practice regulation, it could well prove considerably more formidable.
As FedFin detailed in an analysis of the scope and scale of this systemic consideration, process will set policy as much as personnel on these critical systemic designations. Importantly, the process for activity-and-practice deadlines does not require transparency or complex analytics. Unless FSOC decides to seek comment, it can simply issue an edict laying out risk-mitigating standards it thinks essential for key mortgage activities and products. Naming names for SIFI designation is a more complex process, but far easier than usual for Fannie and Freddie while in conservatorship. If the GSEs are designated, the Fed would share power over them with FHFA, making it easier for the Administration to cut the GSEs loose from conservatorship without abandoning the hard-knuckled control it seeks early in the process of transitioning the U.S. back to a private-sector mortgage market.
To read Karen Petrou’s latest speech, click here
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Karen Petrou’s latest column can be found here
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