Kudos to Barron’s for being the most pro-active in reporting on the Fannie Mae and Freddie Mac saga.
It was Barron’s that posed the question on their March 10, 1008 cover, “Is Fannie Mae Toast?”. Then back on August 17th they published an article questioning the solvency of these two institutions (here’s a link to my blog posting about this article). As we all know the government assumed control of these two entities last week because of concerns over their solvency.
This time around Barron’s is being pro-active once again and taking the lead on predicting what the future will look like for the mortgage market in this article which is featured in this week’s edition.
Although the author does not make any specific predictions on the outcome of Fannie Mae and Freddie Mac he does reference the “covered bond” model which I blogged about back on July 30, 2008.
The covered bond model is similar to the current structure in that under this model banks would securitize the mortgages they make and sell them to investors (which is the role that Fannie Mae and Freddie Mac play now). This would provide them with fresh capital to make another mortgage (thus providing liquidity) but would also eliminate interest rate risk from their balance sheet.
However, this model is different in that the banks that made the mortgage would also assume the guarantee of the future interest payments on the mortgage-backed bonds. Currently banks are able to assign that guarantee to Fannie Mae and Freddie Mac. We can assume then that banks would likely be more conservative about their underwriting of loans.