Big Changes Coming for Mortgage Market

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Late last week the Obama Administration does what it often does when it's about to announce something controversial: It leaks a little bit to the news media to soften the blow. And so it was with the highly-anticipated, and currently overdue, "white paper" on reforming Fannie Mae and Freddie Mac. The paper is expected by the end of this week.

As we have reported on this blogbefore, it will likely include several options and scenarios, playing each of them out to conclusion. We already know that the goal is to reduce the government's role in the mortgage market, which right now is 95 percent of all new originations, according to a report out today from Lender Processing Services. Republicans want that sooner than later, but most say it will take at least five years.

What leaked last week was the idea of reducing Fannie, Freddie and FHA loan limits, currently at $729,750 for high-priced markets to $625,000. I'm not sure that is going to make a whole lot of difference. Remember that the loan limit used to be $417,000, before the housing crash. It was raised because government was the only game in town. Home prices have since fallen dramatically, and depending on what report you choose to believe, are still falling. A far lower loan limit, even while the median home price in California is still , would help to jumpstart private label mortgage securitization again. The jumbo market is already coming back.

I know, but what about the soonish-to-be-announced "Qualified Residential Mortgage" standard, or the risk retention rules necessitated by the Dodd-Frank legislation. This is the standard by which lenders would not have to hold onto 5 percent of a loans risk. If it ends up being 20 percent down, which many believe it will be, then that's harder for higher-priced markets. Still, I'm not so sure someone buying an expensive home should be able to do so with little to no skin in the game.

There is no question the white paper will include plans to make Fannie and Freddie loans more expensive, reportedly by raising guarantee fees, which in turn might make private label RMBS cheaper. This could be done without legislation, so that's particularly helpful. But that makes trouble for the Federal Housing Administration.

The FHA is currently too big.

Even its commissioner, David Stevens, admits that openly whenever and wherever he can. FHA has made itself more expensive already, but it still has far too large a market share. Tough QRM standards and a pricey Fannie and Freddie system would push more borrowers to FHA, which is exempt from QRM.

So where does that leave us? Likely with more expensive mortgages, no matter how you slice them. The convergence of several storms, the GSE white paper, the QRM standards release, the budget release and continued reports of a very shaky housing recovery, necessitate creative thinking. I'm headed to the American Securitization Forum conference in Orlando later today, and that will be much of our discussion tomorrow on CNBC.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick