Mortgage Reform: Let the Games Begin

US Capitol Building

As expected, the fight over the fate of Fannie Mae and Freddie Mac is now heating up on Capitol Hill.

Later today House Republicans are expected to introduce a bill from GOP Conference Chairman Jeb Hensarling that would wind down the two government sponsored entities in five years.

Hensarling and other Republicans not that the Congressional Budget Office has estimated the GSE's will cost taxpayers $389 billion over ten years.

They've already inhaled $150 billion in taxpayer dollars.

The bill, backed by House Financial Services Committee Chairman Spencer Bachus, is similar to bills introduced in 2008 and 210; the difference now of course is the new House Republican majority.

Aides familiar with the bill say it would put an end date to the GSE's conservatorship two years from the date of enactment.

It would repeal the GSE's affordable housing goals mandate, shrink their size by capping the maximum portfolio size at $700 billion and then gradually reduce to $250 billion over five years. It would also return the conforming loan limit to $417,000.

That last one is particularly important to think about as we struggle through this Spring market and try to call it a "recovery." Credit is still one of the biggest barriers to recovery today, and the private market for jumbo loans is thin at best.

CNBC Investor Guide to Spring Real Estate 2011 - See Complete Coverage

I want to share some insight from FBR's Paul Miller:

"We expect the private market share to rise, mortgage rates to increase, and homeownership levels to decrease as the focus shifts to affordable rental housing. Overall, we believe the best-positioned companies in this debate are the large money center banks, like Bank of America (BAC – OP) and Wells Fargo (WFC – MP), while small servicers could see profit margins squeezed and lower normalized ROEs on new mortgage insurance business being written."

GSE reform also comes amid new regulation for risk retention in the mortgage market. The expectation is that borrowers will be required to make larger down payments for the best deals. Essentially, borrowers will shoulder more of the risk so banks don't have to.

More from Miller:

"Every player in the mortgage market will be impacted by the sweeping regulations coming their way. Both small and large banks will have their profit margins squeezed as servicing fees drop and guarantee fees rise. That said, we believe that the large money center banks that benefit from economies of scale, like Bank of America and Wells Fargo, are the best positioned to weather the regulatory and economic changes while small originators and servicers will likely find it hard to compete under the new rules."

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