CBO: Private-label MBS would have rebounded faster without Fannie, Freddie

The private-label, mortgage-backed securities market would have rebounded faster from its near extinction during the financial crisis but was hindered by the growing reach of Fannie Mae and Freddie Mac, according to a new analysis from the Congressional Budget Office. With the Treasury Department set to release its guidance on how to reform the government-sponsored enterprises in January, the CBO released its own research detailing the different options Treasury and eventually Congress could take when sorting out two companies that have already drawn $148 billion from taxpayers and could potentially reach $221 billion in a best-case scenario through 2013. One of the many options explored was a fully private secondary mortgage market. This would bring an end to the government guarantee of MBS or debt securities. Congress would wind down Fannie Mae and Freddie Mac and sell their assets in pieces or as a whole to private investors. The private-label MBS market was “negligible” when Fannie and Freddie were chartered, but it grew rapidly from the 1990s through the housing bubble to 2006. Nonagency MBS issuance actually spiked in 2005 at more than $280 billion. That deflated to just $5.5 billion in nonagency MBS issued in 2009. In April, Redwood Trust (RWT) issued the first private-label RMBS since 2008, but had the GSEs not ventured into new areas such as jumbo mortgages where private companies could not compete, the market would have bounced-back faster, the CBO said. “In other words, the private-label market might have rebounded more quickly in the absence of Fannie Mae and Freddie Mac,” according to the CBO. If Congress was to take the step of privatizing the GSEs, the transition would have to be done carefully and slowly because Fannie and Freddie play such a dominant role in the mortgage market. Still, fully privatizing the secondary market would pose two risks: that the government may not fully be able to remove itself from rescuing companies that fail and that privatization would not ensure a “stable supply” of credit to housing in times of crisis. If investors still perceived the government would be willing to bail out firms considered too big to fail, institutions in the secondary mortgage market could continue taking excessive risks, exposing taxpayers even without Fannie and Freddie. The CBO pointed out in the report’s preface that it was not making any recommendations. It explored other options such as transitioning the two companies into a full federal agency where the government would absorb all credit losses and creating a hybrid model where taxpayers and investors would share in the risk. “Whatever their fate, the two GSEs have a valuable investment in infrastructure and data for securitizing mortgages and in the skills of their employees and their relationships with servicers and lenders,” the CBO said. Write to Jon Prior.