Wells Fargo analyst: GSE reform is a long-time away


Does anyone really want the housing GSEs to be reformed?

Despite a lot of political talk about the need to wind down these maligned quasi-governmental entities, there's a lot of incentive all around to maintaining the status quo. The reality is that Fannie Mae and Freddie Mac are back to doing gangbuster business---though the spike in interest rate could crimp them---and they are providing a much-needed source of revenue for Uncle Sam.

At the same time, the residential real estate market has been percolating, and wrenching change to the GSE may not be welcome development at such a critical time. Hedge funds have built up massive stakes in GSE preferred stocks and would like to a return, which would entail their survival in some or fashion. So despite the hugely publicized Corker-Warner proposal, which would wind down the big housing GSEs in favor of direct private insurance, there will likely not be a lot of change anytime soon.

Wells Fargo structured products analysts wrote to clients: "We continue to believe it would be at least 5 to 7 years before any significant change to Fannie and Freddie will occur, given the complexity, size of their footprint and fragile nature of mortgage finance."

As noted by HousingWire, the analysts offered an easier path to reform. They suggest "continuing to increase g-fees or lowering the conforming loan limit, both of which do not require new law, would be a relatively simple way to reduce the GSE footprint and help crowd-in private markets to return."

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