Monday, December 27, 2010

Reforming Fannie Mae and Freddie Mac

2011 is suppose to be the year that Fannie Mae and Freddie Mac are reformed.  The key to the success of this reform is the non-agency RMBS market.  

So long as the non-agency RMBS market is frozen, the agencies are necessary.  There is not enough capacity on bank balance sheets to replace the agencies.

However, if the non-agency RMBS market is restarted, then the dependence on the agencies is dramatically reduced.

Restarting the non-agency RMBS market is a three step process:
  • As has been discussed repeatedly on this blog, current asset level performance on an observable event basis must be made available to all credit market participants.  
  • With this data, all credit market participants can independently analyze each security using the valuation models of their choice. 
  • Using their independent valuations, investors can then make buy, hold and sell decisions based on the prices being shown by Wall Street. 

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