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Main Website >>Real Estate >>Blog >> Ending GSE Bailout is A Delicate Balancing Act
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Ron D'Vari, Chief Executive Officer & Co-Founder, NEWOAK

Ending GSE Bailout is A Delicate Balancing Act
Thursday, March 03 2011 | 09:01 AM
Ron D'Vari
Chief Executive Officer & Co-Founder, NEWOAK

We agree to a well defined and transparent but gradual end to the bail out of GSEs. The process has to be designed with full understanding of the markets and free of political agenda.

On-balance sheet approach is a good aspiration but has its own pitfalls and challenges. The annual budgetary process for allocating on-balance and on-budget has proven to be problematic and has politicized the process as opposed to making it more effective and efficient. GNMA program history is a good case study.

We believe in the end there has to be two fluid markets existing side-by-side:
1) a revised conforming government guaranteed mortgage market,
2) standardized private non-agency market.

The underwriters of conforming mortgages should be more diversified than just the two GSEs. There is need for more of them and should be privately financed with some well defined tail risk protection from government. There should also be a limit on each conforming sponsor’s size to manage systematic risks and moral hazard. With that there would have be a non-risk-taking independent collateral agents to ensure transparency and uniformity. The underwriting guidelines should also be more dynamically adjusted through the economic cycle to minimize and protect against systematic risk. The independent collateral agents should be regulated but not part of direct government administration.

We do believe the securitization of non-agency market is critical but in this case uncertainty in well defined legal frame work and Dodd-Frank rules has severely been the bottleneck.

Significant unsold non-performing loans and REOs stock in the banking system will continue to be a major road block to the non-agency securitization.

We agree to a well defined and transparent but gradual end to bail out of GSEs. The process has to be designed very carefully. On-balance sheet approach is a good aspiration but has its own challenges. The annual budgetary process for allocating on-balance and on-budget has proven problematic and politicize the process as opposed to making it more effective and efficient. GNMA program history is a good case study.

We believe that there has to be two markets:
1) conforming government guarantee mortgage market,
2) non-agency market.

However the underwriters of conforming mortgages should be more diversified than just two agencies and these should be privately financed. Perhaps there should be a limit on each agency size due to systematic risk. With that there would have be a non-risk independent collateral agent party to ensure transparency uniformity. The underwriting guidelines should be more dynamically adjusted through the economic cycle to minimize and protect against systematic risk. The independent collateral agents should be regulated but not part of direct government administration.

We do believe the securitization of non-agency market is critical but in this case uncertainty in legal frame work has contributed to lack of market start.

Significant unsold non-performing loans and REOs continue to keep the non-agency RMBS a non-starter.

Standardized servicing need to also be addressed.

Lastly, lack of well defined rating criteria will be a problem to get the market started.

It is critical for US economy to have a well functioning residential mortgage markets and we believe it should be more of a national priority.
0 Comment | Add Comment(s) | GSEs, Mortgages, Regulation, Securitization, US_Administration, US_Economy,


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