The comments from Fratantoni come when the Trump administration signals potential plans to merge the companies sponsored by the government (GSEs) and to pursue a supply offer this year.
“There must be at least two GSEs and we think that competition in the secondary market is really beneficial for the system as a whole,” Fratantoni said in an interview with Housing.
Although the two companies offer comparable products and have maintained disciplined credit standards, Fratantoni noted that at various points during the conservatory, one or the other served as a stronger partner of the primary market – an advantage that can be lost in a merger.
Proponents of combining the GSEs claim that competition in the past in the early 2000s fueled excessive risks, which contributed to the financial crisis of 2008. They also point to potential efficiency gains. Together, the two GSEs employ around 15,000 people, with 2024 general and administrative costs of a total of $ 6.5 billion.
In response, Fratantoni countered that reforms after the crisis-including the assets of the Dodd-Frank Act of the Repay and qualified mortgage rules have tackled this risk problems. In addition, before the crisis, the GSEs charged around 20 basic points per loan. Today they charge 50 BPS, which reflects stronger capital standards.
“The system as a whole is really as strong as it has ever been. So I understand the care, but I don’t think that was really a problem like it would have been 20 years ago,” Fratantoni said.
The GSEs already coordinate in areas where competition adds little value, such as the uniform mortgage-supported security (UMBs) and the too much announced (TBA) market, which together improve the liquidity of the secondary market. Outside of these areas, Fratantoni sees clear benefits when having two competitors.
Sharing offer
The Trump administration reportedly tries to offer between 5% to 15% of the shares of the GSEs, with a combined appreciation of around $ 500 billion, according to a report from the Wall Street Journal.
For Fratantoni, selling shares without turning, not “attractive” for investors due to policy uncertainty seems to be. In the meantime, the uncertainty about what these companies will look like, the capital structure and the nature of the role of the government, make it very difficult to achieve a precision for a appreciation on this point.
American treasury Secretary Scott Bessent and Federal Housing Financing Office (FHFA) Director Bill Pulte has emphasized that the final test of each reform will be stable mortgage interest and continuing market liquidity. But an explicit warranty is still needed, Fratantoni added.
“There is an expectation that in the event that something very bad happened, the government would intervene because these were congress companies with a critical housing mission,” Fratantoni said. “To a certain extent that has not changed. But we have always thought it would be a much better result to have an explicit backstop.”
Fratantoni said that an explicit guarantee would help to guarantee stability on the securities market covered by Mortgage. Without this, it is assuming that investors will respond as before 2008 ‘a high risk of taking’.
Investors will keep a close eye on the required capital levels and guarantee reimbursements; If they are too high, things can shift to bank balances, private label securitization or the Federal Housing Administration (Fha). The MBA also wants bank regulators and the Securities and Exchange Commission (SEC) included in the discussion.
“I am not an investment banker, but what I understand, just this issue in November, the investment -benchable side of it, maybe that is possible,” said Fratantoni. “But to ensure that you take into account all these other perspectives and what the impact of the market would be, it is difficult to understand how they can do that in November.”
The MBA has long advocated an explicit backstop, termination of volume-based price discounts and maintaining a clear separation between the secondary market activities of the GSEs and all primary market activities.
The role of the FHFA should also shift by waiting for its conservatory forces and concentrating solely on regulations, with an emphasis on safety, reliability and mission supervision.
“For many years there has been this mix between their curator hat and their regulator hat,” said Fratantoni. “They should go back to that regulation role, where it is really a check on safety and reliability and mission.”
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