Legislation that would eliminate the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. could be a boon for non-agency issuance.
Senate Banking Committee Chairman Sen. Tim Johnson (D-S.D.) and ranking member Sen. Mike Crapo (R-Idaho) announced last month an agreement on a housing finance reform proposal.
In addition to eliminating Fannie Mae and Freddie Mac, the legislation would create a common securitization platform and replace the Federal Housing Finance Agency with the Federal Mortgage Insurance Corp.
A report announced Monday by Moody’s Investors Service indicated that if such legislation were enacted, private-label issuance of residential mortgage-backed securities would increase.
The reason, according to Moody’s, is that fewer residential loans would be eligible for inclusion in government-guaranteed securities.
In addition, the common securitization platform would encourage issuance of both private-label and government-guaranteed securities as long as it gives investors added confidence in the securitization market because of increased transparency and standardization. It would also encourage inactive originators and aggregators to participate in the secondary securitization market.
Another factor is the improved access smaller lenders would have to the MBS market through the proposed formation of a small-lender cooperative.
One possible downside to the bill is the uncertainty created during a transition period when Fannie and Freddie wind down. The potential disruption to secondary market liquidity could dampen originations and RMBS issuance.
Another factor that could hold back private-label issuance is keeping current loan limits in place.
The ratings agency expressed doubt about passing such legislation this year thanks to mid-term elections.
