SFA to Mnuchin: Don't rush GSEs out of the conservatory

The Structured Finance Association has urged Treasury Secretary Steven Mnuchin not to immediately fire the government-sponsored companies from the conservatory in response to a report that such a move has been considered.

"We urge the Treasury Department to take responsible steps to avoid the potentially damaging effects of early clearance of the GSEs," said CEO Michael Bright in a letter the group sent to Mnuchin on Monday. Bright previously served as an executive at government mortgage bond insurer Ginnie Mae from July 2017 to January 2019.

The Federal Housing Finance Agency has been consistently keen to get out of the conservatory under the Trump administration and has recently completed a revised capital plan to that end. This has led to the belief that the Trump administration would like to hurry to complete such an exit on the way out. The Biden government is expected to push the exit from the Conservatory into the background.

"If no progress is made before the change in administration, it is unclear whether Democrats want to change the status quo of what is generally considered to be 'working' when other areas of government oversight may have more pressing problems," said Keefe, Bruyette & Woods analyst Bose George on Monday in a research report.

The letter from the SFA, which represents 370 institutions active in the capital markets, highlights a major obstacle to a speedy clearance of the Conservatory: the potential impact on the vast unified market for mortgage-backed securities that the GSEs and the U.S. real estate finance market place rely on for liquidity.

“We hope that Finance will make sure the transition to the next phase of real estate financing is stable and healthy, not the one that whips investors back and forth, is tied to current politics, and is difficult for asset managers to explain with a strong one fiduciary responsibility for the retirement plans and 401,000 investments under their responsibility, ”said Bright.

In its letter, the SFA said it was in favor of an eventual discharge from the conservatory, pointing out that measures like the capital rule have helped stabilize their finances. However, members would like a few other issues to be addressed first.

Above all, this includes a clear definition of the level and form of government support that would be available to the GSEs after the conservatory. In the early days of the pandemic, since the Federal Reserve supported the latter market but not the former, the MBS private label markets did not rebound as quickly as the GSEs' MBS.

Other trade associations have also suggested slowing the government down – not just on exiting the conservatory, but also on executing the capital plan.

Robert Broeksmit, President and CEO of the Mortgage Bankers Association, said in a recent statement that some aspects of the final plan – like the slightly more humble treatment of credit risk transfer vehicles that use the GSEs – are improvements over an earlier version, but should examine the implications more closely before implementation.

"We … remain concerned that the high leverage requirements are more often than appropriate mandatory and will continue to add negative consumer impact," he said. "Given that this rule affects both the cost and availability of mortgage credit for borrowers, the FHFA believes that a quantitative impact study should be conducted to determine the full impact."

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