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Strategies & Market Trends : Freddie Mac (FRE) pops the housing bubble

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From: mlkr7/20/2010 9:22:51 AM
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KBW Calls for Comprehensive Reform of Government Sponsored Enterprises
9:00a ET July 20, 2010 (Business Wire)
KBW, Inc. (NYSE: KBW) a full service investment bank that specializes in the financial services sector, today urged the Obama Administration to review the nation's housing finance system and offered its own plan for comprehensive reform of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

"Although Congress passed, and the President is expected to soon sign, comprehensive financial reform, one huge part of the financial services industry was forgotten," noted John G. Duffy, KBW Chairman & Chief Executive Officer. "The U.S. mortgage business is now left essentially nationalized with no plan in place to address reform. At $145 billion and rising, the GSE bailout will undoubtedly turn out to be far and away the single largest cost to the taxpayer from the recent financial crisis," Duffy added.

In response to the Treasury Department's request for public input on this issue due tomorrow, KBW is proposing a plan for comprehensive GSE reform that maintains the critical function of the GSEs to sustain the housing market while also eliminating the market distorting operations of the past. Under the KBW plan, GSEs would be transformed into cooperatives of mortgage lenders, putting those lenders' capital at risk ahead of the taxpayer. Specifically, KBW is recommending a three step approach:

-- Recapitalization of the GSEs with private sector funding in order to achieve a stable system with market discipline, including "skin in the game" by private mortgage originators.

-- Phasing out of the GSEs portfolio retention activities except those that support the guarantees of conforming mortgages, including setting up a "Bad GSE/Good GSE" structure to aid in the transition.

-- Continuity of the mortgage securitization process during reform to ensure that there is no major disruption in mortgage availability.

"In our view, the GSEs play a critical role in U.S. mortgage finance, creating a liquid market for long dated mortgages preferred by customers but difficult for banks to keep on their balance sheets," said KBW's Duffy. "However, we recognize that the GSEs also played a critical role in the excessive leverage in U.S. housing that precipitated the downturn. As a result, we believe that reform is necessary to ensure that federal policy does not exacerbate future boom and bust cycles."

More details of the KBW plan on GSE reform can be found in an open letter to the U.S. Treasury Department, submitted today, and accessible online at
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