Page 32 - May-June 2018 GSE Report Flip Book

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a key source of private capital, but the GSEs also need private equity. The GSE market has the hallmarks of regulated utilities; large entry barriers, shared infrastructure and large community value. Consequently, a regulated utility ownership structure should be well adapted.”
Taxpayers should have about 5%—or $250 billion—of credit protection in the GSEs for $5 trillion of guaranteed mortgages, according to Cooperstein. To recapitalize the GSEs, he advocates raising $100 billion of equity for the enterprises, along with a “fully penetrated” CRT program.
Competition will not work for the mortgage insurance industry because the cost of infrastructure and intellectual property for servicing, automated underwriting systems, quantitative models, securitizations, which would be needed for each new mortgage guarantor in a competitive multiple guarantor would be prohibitively expensive, argues Cooperstein. Moreover, if each guarantor had its own CRT security, the market would be fragmented and illiquid. Issuing combined securities would lead to free rider problems “because firms are incentivized to contribute riskier loans and benefit from more valuable combined securities,” said Cooperstein. “Who arbitrates to assure consistent quality? And by the way, the same problem would exist for standard MBS as well. Maybe combining Fannie and Freddie into the Common Securitization Platform (CSP) would not result in free riding, but with five new entrants, it seems inevitable.”
“We have to accept there are limits to what can be changed and that no system will ever be perfect, but taking into consideration the legislative calendar, the current state of the GSEs and assessing what is possible, the Moelis plan—or the very similar principles proposed by Mel Watt or by the Independent Community Bankers of America—makes the most sense,” said Moelis & Company’s Landon Parsons. “Essentially all three keep Fannie and Freddie as two entities but prevent them from having the investment portfolios which got them into trouble, with strong oversight by the FHFA and much increased capital. There should be significant private capital so that Fannie and Freddie can meet and achieve SIFI-like capital requirements. They could then continue their CRT activities as a second level of credit protection providing the frosting on the cake.”
There is a growing consensus that Fannie Mac and Freddie Mac should be private enterprises, regulated like utilities, continuing their CRT activities. The Moelis Blueprint, published last year, outlines Parsons’ firm’s proposals for how this could be achieved.
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