We Need a New GSE: Please Welcome Fattie Mae

Every day there is a new article on the housing crisis and every day there’s a new offered solution.  Since everyone else is doing it, I figured it’s time for me to throw my idea into the ring:

My Idea:

The U.S. Government should set up another Government Sponsored Enterprise (GSE) charged with providing liquidity and stability to U.S. housing’s jumbo mortgage market.  Jumbo mortgages are necessary on loan amounts above $417,000 to $625,500 depending on the affordability of homes in each market.

If we look back to 2005, jumbo mortgages could be had with 5% down (with a 2nd mortgage for the amount over 80% LTV) and at mortgage rates often only .25% to .75% more than conforming conventional rates.  Flash forward to today and we find that most jumbos require at least 20% down (if not more… 2nd’s are practically non-existant) and rates I’ve seen quoted recently are 2% – 2.5% higher than conventional conforming rates, which lately means 7% or so.  I think everyone will agree that jumbo lending suffered from lax requirements and was too cheap for the inherent risk in the product but I believe the pendulum has swung too far the other direction and that today’s terms and rates are out of line for real risk.

Some people will argue that the government should not “bail out the rich” but this isn’t a question of bailouts, this is a question of liquidity and stability.  Today most banks want nothing to do with any loan that they can’t resell to Fannie Mae, Freddie Mac, or Ginnie Mae because they do not have the asset base needed to hold these loans for their 30 year terms, they often immediately resell them to the GSE’s or another party.  Since jumbo mortgages have no secondary market, most banks have to hold any jumbo mortgage they write.

$100′s of billions have been offered up to financial institutions to improve liquidity in the lending market and yet there has been no improvement in the jumbo mortgage market and in fact it looks like this segment has actually become worse in recent months.

Enter a new GSE: Fattie Mae

Fattie Mae’s sole focus will be restoring liquidity and stability to the jumbo mortgage market.  They shall do so in much the same way that Fannie Mae and Freddie Mac run: Fattie Mae will buy jumbo mortgages from the originating banks and repackage them as mortgage backed securities and resell those in the open market.  Down payment requirements will continue to be higher than in the past… maybe we keep a 20% down payment… but because lenders can resell these loans to Fattie Mae and Fattie Mae can offer better interest rates when they repackage them as mortgage backed securities, the interest rate spread between conforming and jumbo loans should narrow substantially.

The nice part about this is that like much of the rest of the stimulus that the government has employed, it should be long-term revenue neutral if not even a profit making enterprise since the government is not subsidizing anything but rather “market making” for a product that today has no effective secondary market.  In the future the secondary market for jumbo loans will likely improve but even in that situation a GSE like Fattie Mae would still have significant value… just like Fannie Mae and Freddie Mac have for decades.

Others have discussed this general concept, however no one else has come up with a name as cool as Fattie Mae.  I can’t wait to see the letterhead!