Washington's Witchhunt Against the GSEs

With little fanfare or formality the Obama Administration has cut the GSEs adrift - or at least has shown every sign of doing so when Congress presents what is sure to be draconian redesign of these institutions.

CEO of Walker & Dunlop Willy Walker bemoaned the plans at the recent RealShare Washington. Among other unpleasant developments for consumers, they will likely lead to the demise of the 30-year fixed mortgage and usher in a new level of volatility. Multifamilies will be fine, he said, in that eventually the privatization of the GSEs will result in more apartment renters.

Proponents of the idea that the private sector can step in were given a boost recently when Redwood Trust, closed a $290 million prime jumbo RMBS -- a private-label offering.

The most senior securities in the securitization represented 92.5% of the principal amount and were rated "AAA" by Fitch.

The company all but issued invitations to the re-opening of the private mortgage securitization market, courtesy this transaction.

"This residential mortgage securitization demonstrates that the private sector can finance residential mortgage loans without government backing at levels that are attractive to borrowers and investors," said Brett D. Nicholas, Redwood's Chief Operating Officer, in a prepared statement. "More specifically, the economics of this transaction support private-sector financing of prime mortgages with rates that are within 0.5% of the rates on mortgages financed through Fannie Mae or Freddie Mac."

Fair enough. After all, this was only the second major such offering in the last few years.

But I am more in Walker’s camp than Nicholas. There are too many unknowns to blithely proceed with the sidelining of the GSEs.

Here is why:

• One deal does not make a market. At the beginning of the year, Moody’s noted that losses on private-label residential will increase this year in an outlook report. However, it also said the rate at which loans in RMBS become delinquent can expect to decline.

• We need more certainty in the foreclosure process including a settling of the robo-signing scandals. We haven’t heard much of these cases since the initial flurry of news several weeks ago, but rest assured they have not gone away. Before the private sector can step in with any sort of authoritative role, the process needs to be spin-and-span clean for both lender and borrower.

• Congress doesn’t understand enough about how the GSEs support multifamily. Also speaking at RealShare Washington, National Multi Housing Council President Doug Bibby told of one conversation he had with a Congressperson who didn’t even realize that they financed multifamily. Care to guess whether this person know of their (less than 1%) delinquency rate?