Category Archives: FED Mortgage Role

Role of the federal government in residential mortgage lending

GSE Change Status?

Status

GSE Change in Status?

Will the status of the GSEs ever change? It is questionable whether any change can be accomplished in a midterm election year. We have seen some action in 2025. There is a strong concern whether the private residential mortgage market has the capacity to pick up any reduction in the market percentage currently handled by the GSEs. The private market for securitization of residential mortgage loan (“RMBS”) is only about 20% of its pre-crisis size. SEC registered RMBS is non-existent today, likely as a result of an ABS rule change in 2014 that requires disclosure of up to 270 data point for every mortgage loan. This disclosure is required at the time of issuance and periodically thereafter for the life of the securitization. There has not been a single SEC registered RMBS since this requirement became effective. So the private market today in RMBS consists solely of private placements, for which the market is more restrictive.  

Relying on this more restrictive market to take up the slack caused by a reduced GSE footprint would seem unlikely. Without the more robust SEC registered RMBS market functioning, reducing the GSE footprint would seem risky; any significant impairment of the ability to finance single family homes would adversely affect the economy and be politically fatal.

The new administration at the SEC has taken a step in resolving this dilemma with the publication of a concept release seeking comment generally on the Commission’s ABS rule and particularly on the loan level data requirements. See Release 33-11391, Sept. 26, 2025. The comment period closed in early December, so the comments are now available online. If the SEC is able to find a disclosure solution acceptable to the market, it may be able to restart the SEC registered RMBS market. Only then would change in the status of the GSEs be possible.

U.S. Housing Overview

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U.S. Housing Overview

The continued conservatorship of Fannie Mae and Freddie Mac exposes taxpayers to continued risk. &nbsp The failure to address the GSEs and release them from the conservatorship evidences a significant failure of political will.

This chart from the latest monthly report from the Housing Finance Policy Center at the Urban Institute provides a fine summary of the government dominance of U.S. residential housing finance.   This imbalance with private sector financing is imposing significant risk on the GSEs and therefore on the government and taxpayers without analysis or justification.   There should be a fundamental analysis of the government’s housing policy and how much risk needs to be taken by the taxpayers in order to achieve the government’s goals.  

Why is CB legislation tied to GSE reform?

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Why is the adoption of covered bond legislation linked to housing finance reform? Housing finance reform is all about the role of the GSEs. While covered bonds certainly can be used to finance residential mortgage loans, they do not require any form of government support. The consideration of the proper role of the government in housing finance can occur independent of covered bonds. However, I hear from many sources that covered bond legislation would only be considered after GSE reform had been adopted or perhaps considered with GSE reform.

There is no apparent logic to this position. Covered bonds are a private sector financing technique that has proved very effective in other jurisdictions. There is nothing in GSE reform that would be a necessary predicate to the issuance of covered bonds by U.S. banks. Covered bond legislation would not touch the status of the GSEs. It is possible that covered bond issuance by U.S. banks could develop into an attractive alternative to financing through the GSE and thus reduce the tension in GSE reform, but that would be beneficial to GSE reform.

It seems as though both sides are determined to keep as much pressure on GSE reform as possible in order to achieve their objectives and not permit any private sector initiatives to sidetrack the discussion until the role of the government in housing finance has been solved. But this seems to put the cart before the horse. Shouldn’t the government intervene only where the private sector is not functioning properly? Wouldn’t it make sense to let private sector initiatives develop first before assigning the government a role? If we can agree that the answer to those two questions is yes, why not adopt covered bond legislation and see how the market develops while we debate how to wind down the GSEs and what would be the appropriate future structure for the government’s role in housing finance?

Certainly we can have a fulsome debate on how the government can support housing access for those who need assistance independent of how covered bond legislation is drafted. Certainly if covered bonds, RMBS and the federal home loan banks fail to provide adequate private sector funding for residential mortgage loans there may be a need to consider a larger government role.

It is not essential that covered bonds be enabled through legislation as it is possible to achieve covered bond issuance through securitization techniques, as has been done in other countries. See, e.g., Time for a US alternative. However, investors will have more confidence in a covered bond sector established through legislation and the market may be expected to develop quicker with legislation. Enacting legislation for covered bonds would be a low cost experiment that would have no harmful side effects. Covered bond legislation, therefor, should be enacted before GSE reform is attempted so that we have a better chance to assess what works in the private sector before designing the government’s role in housing finance.

Treasury trying to encourage private funding

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Speaking in Washington on June 26 before the Making Homes Affordable Five Year Anniversary Summit, U.S. Secretary of the Treasury, Jacob Lew, gave a speech in which he addressed the need for housing finance reform. He also noted almost a complete absence of a private label securities market almost six years after the crisis and a need to restore private funding to the residential mortgage market. He noted that a series of questions was posted to the Treasury website seeking comment by August 8, 2014 on recommendations for reviving the private label securities market.

Neither Secretary Lew’s speech nor the posted questions mention covered bonds. Clearly covered bond legislation for the United States should be considered by the Treasury. The legislation introduced in 2011 by Representative Garrett, H.R. 940, passed the House Financial Services Committee by a very strong bi-partisan vote of 44-7. Passage of covered bond legislation should be easily achievable with Treasury backing and covered bonds could provide an important channel of private funding for the mortgage market. After all, covered bonds provide funding for about €3 trillion in the European market and the domestic U.S. market for covered bonds issued by foreign has shown healthy growth.

More Views on Low RMBS Issuance

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In a letter to the SEC dated February 14, 2014, FINRA stated that during the fourth quarter of 2013, the issuance of mortgaged-related securities declined 33 percent compared to the same period in 2012.

Fed Mortgage Role Expands

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With rising rates, new mortgage loan productions has declined. WSJ reports that in November the FED bought 90% of eligible mortgage bond issuance, up from 2/3 earlier in the year, raising liquidity concerns. FNMA/FHLMC issuance fell 59% from a year earlier in November to $82.3 B.

Why is RMBS issuance not growing?

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FT on 12/2/2013 said that CMBS issuance is at the highest since the crisis with year to date issuance at $92.9B. CLO issuance is also booming, but RMBS issuance is anemic. Why is that? Is it because of FNMA and FHLMC? See, CMBS and CLOs are booming, but not RMBS. What does that tell us?