Speculators in GSEs Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) are buzzing today after outgoing Senate Banking Committee Chair Johnson’s (D-SD) statement that if GSE reform is unable to become law, Director Watt should act to take the GSEs out of conservatorship.

Specifically, Chair Johnson stated: “Everyone agrees that conservatorship cannot continue forever, so I hope my colleagues will keep working towards a more certain future for the housing market. However, if Congress cannot agree on a smooth, more certain path forward, I urge you, Director Watt, to engage the Treasury Department in talks to end the conservatorship.”

Discussing the issue, Compass Point strategist Isaac Boltansky also highlighted that later, in response to a question from Sen. Heller (R-NV), Director Watt did not specifically state that the GSEs should be liquidated and instead restated his deference to Congress. Following the hearing, when asked about the merits of taking the GSEs out of conservatorship, Director Watt stated: “Short term I would rule it out…Long term I might not rule it out.”

Boltansky was taken by the comments but is not convinced that the GSEs will be removed from conservatorship. “Given that we remain bearish regarding the prospects for GSE reform legislation, the notion that the GSEs should be removed from conservatorship through administrative action at some point in the future remains noteworthy. With that being said, we caution against placing too much near-term value in these comments as any road to administrative action addressing the GSE conservatorship is long, complicated, and littered with political potholes.”

The strategist also noted that while principal reduction is not entirely off the table, it remains unlikely. “The sole set of fireworks during the hearing was Senator Warren’s exchange with Director Watt over the FHFA’s unwillingness to embrace principal reduction on GSE loans. During her questioning of Director Watt, Senator Warren stated: “You’ve been in office for nearly a year now and you have not helped a single family, not even one by reducing principal.” Notably, Director Watt stated the FHFA has “not taken responsible principal reduction off the table as an option” and is “getting closer” to making a decision. Our sense remains that Director Watt is unlikely to embrace the principal reduction on GSE-backed loans through HAMP given that both the political and practical risk/reward calculations favor holding steady on the agency’s standing opposition.”

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