Fannie Freddie Reform Benefits Big Banks, Mortgage Insurers: Report

NEW YORK (TheStreet) -- Big banks and mortgage insurers are likely to see the greatest benefits from changes to the bailout of Fannie Mae(FNMA) and Freddie Mac(FMCC) unveiled by the U.S. Treasury Department and the Federal Housing Finance Authority last week, according to a report published Monday by FBR Capital Markets.

The Treasury bills the changes as "further steps to expedite the wind down" of the government-sponsored enterprises (GSEs), which have received some $200 billion each in taxpayer support since being put into conservatorship by the Treasury in 2008. As part of the changes, the GSEs investment portfolios will be wound down at 15% annually as opposed to the previous 10% rate.

However, FBR analyst Ed Mills points out that the accelerated wind down "does not limit the amount of loans that Fannie or Freddie can guarantee; this is just the loans in their retained portfolio." As a result, "nothing in this agreement reduces the dominance of Fannie and Freddie in the securitization of conforming loans."

The GSEs currently guarantee the overwhelming share of U.S. home loans, and will continue to do so. So while Treasury claims it is winding down the institutions themselves, what it is really doing is winding down the percentage of loans they carry on their balance sheets. The rest are securitized and sold to investors, with the GSEs still standing behind them if the borrower fails to pay.

In order for the GSEs to stand behind a loan, however, it must meet certain predetermined criteria. An increasing number of rules for mortgages are only making those criteria more strict. And who better to meet those criteria than a home lending factory like Wells Fargo(WFC) JPMorgan Chase(JPM) ,US Bancorp(USB) or PNC Financial(PNC) that can take advantage of economies of scale? Mills mentions all these institutions as likely beneficiaries in his report.