Morning Report: Trump Admin recommends privatizing the GSEs 6/22/18

Vital Statistics:

Last Change
S&P futures 2767 14
Eurostoxx index 384.04 3.19
Oil (WTI) 67.44 1.9
10 Year Government Bond Yield 2.92%
30 Year fixed rate mortgage 4.57%

Stocks are higher on no real news. Bonds and MBS are flat.

The Trump administration released a set of principles around privatizing the GSEs. It is more or less the same thing as before – the goal is to lessen the government’s footprint in the mortgage market. The idea would be to have Fannie and Fred issue MBS with a catstrophic government guarantee – in other words, some private mortgage insurer would bear the initial losses and the government would only step in if the losses exceeded that number. That is all well and good, however there are all sorts of issues that remain before private label MBS can do the heavy lifting of the mortgage market.

First and foremost, there is a huge gulf between what the MBS investor market requires as a rate of return and current mortgage rates. In a perfect world, PL MBS would trade at similar levels to Fannie / Freddie MBS, but they won’t. There are huge governance issues that need to be resolved. For just one example, will the servicer (who is probably the issuer, who may also have a second lien) service the loan to benefit the MBS holder or themselves? What about reps and warranties? I went into more depth about this whole issue here. These uncertainties need to be priced in, which means that the bid / ask spread between private label and FNMA MBS is so large that nobody would take out a mortgage at the rate the private label investors require. That is a necessary but not sufficient requirement to bring back private money into the US mortgage market.

Taking the GSEs out of conservatorship is going to require legislation, and to be honest it isn’t a priority for either party. As far as DC is concerned, yes it would be nice if the government could lessen its footprint in the mortgage market, but people are getting loans, and the market is functioning normally. It just isn’t a priority.

The US borrower believes that the 30 year fixed rate mortgage is nothing unusual. In fact, it is a distinctly American phenomenon, where the borrower bears no risk. In the rest of the world, mortgages are adjustable rate, and not guaranteed by the government. In other words, the borrower bears the interest rate risk and the bank bears the credit risk. In the US, the bank bears the interest rate risk and the taxpayer bears the credit risk. Upsetting that apple cart is going to be a tough slog politically.

Finally, the news did nothing for the stocks of Fannie and Fred, which continue to languish. When the government took over Fannie and Fred, they left 20% of the common outstanding. This was an accounting gimmick to prevent the government from having to consolidate Fan and Fred debt on its balance sheet (incidentally, this was the reason why LBJ privatized the GSEs in the first place). The government could not take the GSEs through a bankruptcy without creating chaos in the mortgage market. So they left 20% outstanding and decided to deal with the bankruptcy part later. The stock should be worthless, but it is a litigation lottery ticket.

A Federal Judge ruled yesterday that the CFPB’s structure is unconstitutional. The PHH case never made it to SCOTUS, but it will be interesting if this one does. At some point, the CFPBs structure will make it to SCOTUS, and the only one with the standing to defend the agency is the government.

45 Responses

  1. what % of the market are construction loans? kicking around the idea of a major renovation and talked to a bank .. found out the loan has 0 government backing.

    Like

  2. Yep.

    “Trump’s Family Separation Scandal Has Revealed Every Species of Hypocrite

    Immigration hawks and War on Terror monsters alike are using President Trump’s revolting present to expiate past sins
    By Matt Taibbi”

    https://www.rollingstone.com/politics/features/trump-family-separation-scandal-w521824

    Like

  3. from above — when the history is written, this is really what the takeaway is going to be.
    “The Democrats are lucky Trump is such a buffoon.”

    Like

  4. In hindsight, there was no upside for men to do this.

    https://pjmedia.com/instapundit/300070/

    Face facts, women are leaches.

    Like

  5. Just found this quote, it’s great:

    “Vegetarians, and their Hezbollah-like splinter faction, the vegans, are a persistent irritant to any chef worth a damn. To me, life without veal stock, pork fat, sausage, organ meat, demi-glace, or even stinky cheese is a life not worth living. Vegetarians are the enemy of everything good and decent in the human spirit, and an affront to all I stand for, the pure enjoyment of food.”

    https://en.wikiquote.org/wiki/Anthony_Bourdain

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    • Vegetarians, and their Hezbollah-like splinter faction, the vegans,

      that’s one of my favorite lines.

      you’ll be pleased that my 9-year-old is a big fan of “turf and turf”

      Like

    • “Vegetarian” is an Iroquois word meaning “failed hunter”.

      Liked by 1 person

  6. Is there still a way to search all the comments on this site?

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    • Scott’s my goto guy on that. He can find anything. I just can search for rudimentary stuff.

      Like

    • That is a good question. I haven’t searched for anything since I switched to the new look updated WordPress. Seems strange that you wouldn’t be able to search, but I don’t see any obvious way to do it.

      Like

      • Scott and Joe: right click on “reader” at the top of the page in the black ribbon and open it in a new window. Then you will find “search” in a menu.

        Like

  7. Yup.

    Liked by 1 person

  8. In all seriousness, if I were a well known Republican I’d NEVER eat out, my assumption is that my food would always have spit or worse in it.

    http://www.dailymail.co.uk/news/article-5877545/Sarah-Sanders-gets-kicked-Virginia-restaurant.html

    Frankly, this is a known-known, why she thought she’d be exempt, I’ll never know.

    What will be hilarious will be the Syrange New Respect for Trump er al once another Republican wins POTUS.

    Liked by 1 person

  9. The replies to this series of Tweets are wild.

    Liked by 1 person

  10. The press has three main kinds of power. One is to motivate the left. Another is to swing the middle. And the third is to demoralize the right. It’s pretty much lost the last of these, and I suspect the second one is fading too.

    https://pjmedia.com/instapundit/300204/

    yep.

    Liked by 1 person

    • I think they have very little of the last two at this point. They are no longer seen as news sources but sources of tribal signaling from the left, making them easy to dismiss.

      Like

  11. This is true.

    Like

  12. Damn Trumpkins won’t listen to us!

    Liked by 1 person

    • the only modern Republican president more popular with his party than Mr. Trump at this point in his first term, according to Gallup, was George W. Bush after the country united in the wake of the Sept. 11 attacks.

      Which makes the media kind of like terrorists?

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      • The left / media has considered every Republican President since Eisenhower to be Literally. Hitler.

        It is boilerplate

        Liked by 1 person

        • Yeah, no doubt (and then dead or out-of-power Republican presidents become, to many, suddenly an example of what a good Republican was like, and go on about how the current Republican president compares so unfavorably).

          But my point is that Republican supporters of Trump are reacting to the media’s non-stop attack on Trump–by their own assertion–the same way Republican supporters of Bush reacted to the aftermath of 9/11. Ipso facto, the media plays a similar role in American politics than terrorists who directly attack America do. This seems to be their assertion, whether they meant it that way or not.

          Like

  13. Kind of a wow.

    Kudos to Obama, empowering Iran has driven these two together.

    Like

  14. Heh

    Liked by 1 person

  15. All they’re good for, amIright?

    Liked by 1 person

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