Barclays: MBS Proposal Promising

Chidem Kurdas

US regulators are preparing a plan for government-sponsored enterprises Fannie Mae and Freddie Mac to transfer the credit risk of mortgage-backed securities to the private sector. This is encouraging, says Ajay Rajadhyaksha, head of US fixed income and securitized products at Barclays Capital.

He expects that if the program is properly executed, with credit attractively priced, there will be a market for the risk assets. Potential buyers range from insurance companies to hedge funds.

One advantage this proposal has over other possible approaches to easing mortgage finance is that it does not require approval from Congress and can be done relatively expeditiously. If successful, this would provide a way to reduce the taxpayer’s exposure to credit risk while Fannie and Freddie remain a key channel for housing finance, Mr. Rajadhyaksha said.

Since the credit crisis Fannie and Freddie have relied on taxpayer support to cover vast losses on mortgages. There is an argument that they should be eventually shut down.

MBS strategies used to be a hedge fund mainstay before the crisis. The rise of a new active market where mortgage credit is priced would create opportunity in particular for managers with MBS expertise.

Mr. Rajadhyaksha said the plan is at an early stage. An explanation of how it would work is in Barclays Capital’s report, US Securitized Products Annual 2012.


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