In a press conference this afternoon, President Obama laid out his plan for restructuring the GSEs. His plan sounds very similar to what is being proposed in the Senate, so there were no big surprises. His plan includes a wind down of Fannie and Freddie (no specific timetable provided) to make room for the private sector. His plan includes some form of government backstop, as necessary to encourage a liquid market for mortgage-backed securities (MBS) and the 30 year fixed rate product. The government backstop would insure investor recovery of principal and interest, but would only be paid after substantial private capital has been depleted. He acknowledged that this will take a long time. He offered a couple of things that could be done much sooner, like creating a common Fannie/Freddie platform for issuing new MBS and reducing Fannie’s and Freddie’s mortgage holdings. He emphasized that any restructuring needs to provide adequate opportunity for first time home buyers.
On Friday, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act. This Act uses increased guarantee fees on new mortgages to pay for reduced payroll taxes. The amount of the g-fee increases will be included in future mortgage rates. Below are general provisions pertaining to increasing the Guarantee Fees for Fannie, Freddie, and FHA. Several elements in the bill are not quite clear and may take weeks or months to determine. The primary questions are: 1. How much will the Fannie and Freddie g-fee rise? The Act calls for a minimum increase of 10 basis points, but the amount of the increase is to be determined by FHFA and is supposed to a)"cover the risk of loss associated with the guarantee", and b) be based on "the cost of capital allocated to similar assets held by other fully private regulated financial institutions". This definition could result in a wide range of fee increases. The early expectation from insiders is that the increase will be 10 basis points. 2. When will the increase become effective? The Act says the increase is to be applied to guarantees issued after enactment of this section. The date this provision is to [...]