NEW YORK (Reuters) - The Trump administration's aspiration to end government control of Fannie Mae FNMA.PK and Freddie Mac FMCC.PK is unlikely to be realized anytime soon, and any weakening of the long-standing government backstop of the mortgage market could hurt housing and the wider economy, said a top investor.
While ending the support would benefit the government, there would be a chain reaction if the costs of mortgage lending were to increase, said Andrew Hsu, portfolio manager at DoubleLine Capital, the investment manager headed by Jeffrey Gundlach. That could, in particular, hit millennials, who are already struggling to buy homes as lending standards have increased since the financial crisis of 2008.
"Our base case expectation is that this process doesn't move forward anytime soon," said Hsu, who is co-portfolio manager of the DoubleLine Total Return Bond Fund DBLTX.O and is a longtime investor in mortgage securities. "It is a very complex process and there would be a lot of ramifications if this were to occur."
Hsu, speaking at the Reuters Global Investment Outlook 2020 Summit in New York, said that such a move “would be ultimately quite negative for the housing market and the broader economy in general.”
“Housing is one of the stars of our economy right now.”
The White House in September said it wants to take Fannie and Freddie out of government conservatorship. The U.S. government took direct control of the companies in the wake of the subprime mortgage crisis.
“Ending the conservatorship and essentially shifting some of these practices away into private markets potentially creates frictional costs, and these frictional costs will be passed on to the borrower,” said Hsu.
Hsu said that transitioning from the GSEs into private markets will spur private lending in the mortgage space and would increase the size of the private non-agency mortgage market.
The DoubleLine Total Return Bond Fund is DoubleLine Capital’s largest fund with $56 billion in assets, invested in products such as mortgage-backed securities (MBS), collateralized loan obligations (CLOs) and asset-backed securities (ABS). DoubleLine Capital manages $147 billion in total assets.
In mortgage securities, Hsu said DoubleLine is actively involved in nonperforming and reperforming loans - meaning loans that were previously delinquent but have become current again. There are a finite number of these private-label loans, so volume is lower than agency-backed securities - high single digit to low double digit billions a year in issuance, said Hsu.
Hsu said that the credit risks posed by the current record-high levels of corporate debt have led them to reduce their position in CLOs. They have moved instead into agency commercial mortgage-backed securities (CMBS) as well as asset-backed securities.
There are currently opportunities in CMBS as they are less susceptible to the risk that borrowers will refinance when interest rates fall. They are adding to their position in ABS “because from a spread perspective we thought they were more attractive.”
Reporting by Megan Davies and Kate Duguid; Editing by Steve Orlofsky
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