November 30th, 2016 6:45 pm | by John Jansen |
As an aside in another life circa 1990 I worked with Tim Bitsberger. He traded Long Bonds when I traded short coupon Treasuries. I guess I should have kept his name active in the rolex. (No smart phone as I am a modern Luddite!)
§ The GSEs have been in the news recently. Their stock prices have spiked since the election and rose some more today on speculation of ending the conservatorships. However, we believe that government involvement is likely in any new GSE model to prevent mortgage rates from rising too much and to fulfil affordable housing goals. We would therefore look to buy any widening in debt spreads due to these headlines.
§ Today Trump’s pick for Treasury secretary (Steven Mnuchin) expressed a desire to end government ownership of Fannie and Freddie “reasonably fast.” The FHFA landing team is headed by Timothy Bitsberger and the FTC/FSOC landing team is headed by Alex Pollock. Both have a GSE background, hinting at increased focus on reform efforts. Nevertheless, the potential appointment of Congressman Jeb Hensarling to head FHFA could trigger investor nervousness as he has previously been a vocal opponent of the GSEs.
§ While the odds of wholesale GSE reform in 2017 remain slim as Congressional focus remains on tax cuts and infrastructure spending, we see incremental steps toward reform. We see the possibility that Fannie and Freddie are allowed to gradually increase their capital buffers (which are set to shrink to just $600mn in 2017 and zero by 2018) by retaining some earnings.
§ A number of factors could help drive reform ahead of the rapidly approaching wind-down end date, including declining GSE capital buffers and the CBO’s release of an estimate on the cost of a potential recapitalization. Similarly, there is reason to believe that the private securitization market could begin to thaw if the Dodd Frank rules around risk retention could change in the new administration.