Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Wells Fargo & Co (WFC), Federal National Mortgage Association (FNMA): Feds Blink on New MBS Risk Retention Rules

Page 1 of 2

Federal regulators recently proposed new risk retention rules for mortgage-backed securities. The rules appear to be a major concession to the real estate finance sector. The Financial Stability Oversight Council, which includes the Federal Reserve, the Federal Deposit Insurance Corporation, and the Securities Exchange Commission, issued the new rules designed to end certain lending practices that played a part in the 2008 financial tsunami.

Wells Fargo & Co (NYSE:WFC)

New MBS risk retention rules at a glance
The proposed rules require banks and other mortgage-backed securities players to retain 5% of the credit risk on their books. This requirement was mandated by the Dodd-Frank reform measure. The aim of the financial overhaul was to include loans deemed to be “qualified mortgage loans.”

This definition would have included a majority of loans currently being offered, but industry supporters argued that such a provision would have hurt the housing market recovery. In response, the Feds have come up with a plan that is far more limited in scope.

In short, the new proposal scraps an earlier plan to exempt only those loans with at least a 20% down payment. Now, the 5% risk retention requirement will apply to certain loans including those where borrowers only make interest payments for a certain set time period (interest-only loans), loans where the principal balance actually increases, and loans with a debt-to-income ratio of 43% (as opposed to a 36% DTI).

The contemplated plan continues the full guarantee on payments of principal and interest provided by Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) while the lending giants remain in the Treasury Department’s conservatorship.

Whether the proposal will create a safer lending and securitization marketplace remains unclear. Final rules are subject to revisions as the regulators will accept comments until Oct. 30, 2013. In the meantime, the proposal will benefit the broader real estate finance sector.

How will new MBS risk retention rules affect the lending market?
If the proposed rules are implemented, mortgage lenders and secondary market makers like Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) as well as a leading real estate mortgage lender and seller/servicer like Wells Fargo & Co (NYSE:WFC) will be affected in different ways.

While last year was profitable for Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC), they still owe the Department of Treasury about $180 billion. The housing giants have been refinancing this debt by selling bonds at lower interest rates in order to repurchase their higher interest rate offerings. Moreover, each has revenues of about $100 billion. But paying back the government bailout debt will take about five years.

In the meantime, the price per share of the common stock is hovering around $1.20. Some analysts correctly note that owning preferred stock of Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) is the way to go because these shareholders will be paid first if and when the Treasury Department unwinds its conservatorship. The Federal Housing Finance Authority (FHFA) could convert those shares into common stock, however.

Given the current common share price, continued guarantees provided under the new risk retention plan, and a lending market still in a shaky recovery, Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) do not look like they are on the path to prosperity.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!