JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD

From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.


The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.

It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.

Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?

And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.

I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.

To read the full article by Ms. Borak, see:

http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html

FANNIE/FREDDIE PLAYING THE FASB 157 CARD

From February 11 Wall Street Journal Article by Nick Timiraos, Fannie and Freddie are stepping up their efforts to purchase some $200 billion of delinquent mortgage loans in their securitization structures. Rather than waiting the 24 month period on a delinquent loan, they mortgage-finance giants are looking to buy those loans out after only going delinquent 120 days.
Good news for investors, as Freddie said that it would buy "substantially all" of its 120 day delinquent portfolio, to the tune of about $70 billion, in one single shot. Fannie is looking at a $127 billion portfolio of delinquent loans, which is claims will be repurchasing over a period of time.
Remember, the federal government took over these two organizations a year and a half ago, and providing  over $110 billion from the Treasury. In December, the government agreed that it would cover an unlimited position of losses over the next three yeears, which means that the organizations can't lose. Plus, they can hold the assets and mark-to-market under FASB 157, giving them stronger balance sheet position.