GSE bill may hurt mortgage debt market - experts

Tue Apr 5, 2005 02:26 PM ET

NEW YORK, April 5 (Reuters) - Legislation proposing a new regulator for Fannie Mae and Freddie Mac could hurt mortgage-backed securities prices if the home loan giants are forced to cut their mortgage portfolios, industry experts said on Tuesday.
A bill offered on Tuesday would create a regulator to succeed Fannie and Freddie's current watchdogs, and would give the new entity the authority to reduce or raise the size of companies' portfolios.

However, the bill does not include statutory limitations on the mortgage portfolios, a stringent curb analysts said they were concerned about.

"There has been some concern that if the agencies are forced to shrink their portfolios, then that support in the mortgage market could go away," said Martin Mitchell, manager of government and mortgage bond trading at Legg Mason in Baltimore, Maryland.

"It is a concern of not having the underlying buying in the market if we sell off and see spreads widen," Mitchell said, adding that prices of mortgage-backed securities had not shown any reaction on Tuesday to the proposed legislation.

The Bush administration, strong advocates of reforming the housing giants, have said they support the portfolio curbs.

Any move to reduce the mortgage portfolio of the government-sponsored enterprises could also impact the amount of U.S. agency debt that is purchased by foreign central banks, market watchers said.

"If over the course of time there is a question over the financial solvency or management of our government (sponsored) agencies, then there may be a reason for Asian (investors) to decrease their demand for bonds issued by those agencies," said Michael Woolfolk, senior currency strategist with the Bank of New York in New York.

"It could materially and negatively impact demand for that class of assets temporarily," Woolfolk said.

Foreign central banks are seen as a key buyers of U.S. debt, and U.S. debt traders are wary of any sign of a decrease in that appetite.

Mitchell, however, downplayed the potential for any cut in foreign central bank buying.

"Unless there is a credit implication, where (the GSEs) would lose their implied backing with the U.S. government or their implied triple-A rating is diminished in any way, it shouldn't have too much of an impact on overseas appetite," he said. (Additional reporting by John Parry in New York)