Panelists Outline Challenges to Releasing GSEs, Possibility of Guarantee
(From left: Ramon Gomez, Libby Cantrill, Warren Kornfeld and Scott Ulm, by Anneliese Mahoney)
NEW YORK–“In any market system where you have some lack of clarity, there’s a price to that,” said Scott Ulm, CEO and Vice Chairman of ARMOUR Residential Reit Inc. “Undoubtedly, the more ambiguity you put into it, the higher the price gets.”
Ulm was speaking on a panel concerning the potential end of government conservatorship for the GSEs, with a focus on if a government backstop would be provided if the cessation comes to pass.
“A guarantee would certainly help a great deal,” Ulm continued. “Or alternatively, it’s ‘what a lack of guarantee and a big question about it might do to us.’ ”
Libby Cantrill, Managing Director and Head of Public Policy at PIMCO, took the conversation a step broader, and pointed out that there are questions about what releasing the GSEs would accomplish from a policy perspective.
“I think we would question this sort of assumption that we have to release the GSEs from conservatorship. I think there can actually be stuff done within conservatorship that achieves the policymakers’ objectives,” she continued. But if they move forward with a release, “then we do think they need an explicit guarantee in order to ensure that there is continued stability in the mortgage market.”
“There are lots of good ideas on how we can move to other guarantee formats or other things, all of which carry degrees of complication, and frankly, some uncertainty,” Ulm said. “But, we have arguably the second most liquid market in agency mortgage-backed securities and a keystone of any thinking about it has to be how you preserve that liquidity and preserve the system we have.”
“We do have this enormous liquidity,” said Warren Kornfeld, Senior Vice President at Moody’s Analytics CRE. “We’ve got now built-up capital. We’ve got these entities which really have improved very materially. We’ve got this very vibrant kind of risk-transfer market.”
“The devil is in the details,” Kornfeld continued. “To mess up the TBA market would really have a very, very, very big negative impact.”
“The ability [of] homeowners to go and lock in a rate ahead of closing,” he explained. “On the liquidity standpoint, that’s just going to mean rising costs for homeowners in a market that’s already stretched from an affordability standpoint.”
“We think Congress needs to codify an explicit guarantee on the MBS,” Cantrill said, referring to the views of her company. “We don’t think that UMBS necessarily could work without having an explicit government guarantee. And sort of the reason why we have the UMBS construct in the first place was because Fannie and Freddie are kind of different organizations.”
Panel moderator Ramon Gomez, Managing Director, Chase, ended the session with a thought exercise: If each of the panelists were suddenly in an elevator with FHFA Director Bill Pulte and Treasury Secretary Scott Bessent, and had a few minutes to advise them on the end to conservatorship, what would they say?
“Preserve expectations,” Ulm said, explaining that there are a lot of good and interesting ideas out there on next steps. “But managing expectations is critical to markets, and preserving an expectation that’s been around for several generations is critical.”
“Do it deliberately,” Kornfeld said. “Let’s take those strengths, try to address some of the weaknesses of the current construct, but do it deliberately and thoughtfully.”
“Don’t fix what’s not broken,” Cantrill added. “There are lots of risks to the downside, if this is not done in a deliberate way.”
