Tuesday, August 6, 2013

Fannie and Freddie look to run out the clock on reform

The International Financing Review had an interesting article on how Fannie Mae and Freddie Mac are trying to run out the clock on reform of the US mortgage finance system.

It came out shortly before President Obama announced his support for reform along the lines of the Corker/Warner bill in the Senate.

President Obama supports, according to a Bloomberg article,
A reformed system must have a limited government role, encourage a return of private capital and put the risk and rewards associated with mortgage lending in the hands of private actors, not the taxpayers.
Regular readers know that the only way to achieve President Obama's goal for a reformed system is by setting up an independent securitization platform that provides observable event based reporting on the performance of the mortgages underlying each security whether the security is a covered bond, securitization or something else that Wall Street creates.

Naturally, Fannie Mae and Freddie Mac do not want to see this type of reform occur.

One way that Fannie Mae and Freddie Mac are running out the clock on reform is by developing their own securitization platform.  Based on documents released by their regulator, the FHFA, this platform will disclose mortgage performance data once per month.

As we learned in the run-up to our current financial crisis, once-per-month or less frequent performance reporting is useless.  Subprime mortgage-backed securities provided this frequency of disclosure and they were called "opaque" by market participants.

The only reporting frequency that lets all market participants know the current status of each mortgage is observable event based reporting.  Under observable event based reporting, every activity like a payment or delinquency involving the underlying mortgages is reported to market participants before the beginning of the next business day.

It is only with observable event based reporting that investors know what they are buying and know what they own.

When investors know what they are buying and know what they own, there is little or no need for Fannie Mae and Freddie Mac.

This is understood by Fannie Mae and Freddie Mac and that is why they are taking action to make sure it doesn't occur.

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