Yesterday, in addition to the Term Asset-Backed Securities Loan Facility (TALF) programs (see earlier posting), the Fed also announced it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises and mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
Why buy securities from these institutions? The Fed is not doing this because it needs Fannie, Freddie and Ginnie’s guarantees. Since the government has already essentially taken over Fannie and Freddie, they are already guaranteeing themselves. No, the reason is the same reason why the Fed is accepting SBA-backed loans as part of the TALF programs: take advantage of the underwriting standards. As the Washington Post notes, Fannie, Freddie and Ginnie “have high standards for credit quality and caps on how large the loan can be.”
The idea behind these two new programs is to unfreeze the high-end of the credit market. And a quick way is to use the existing system. As New York Times notes “the central bank has already lowered the rate to 1 percent, and it cannot reduce it below zero. Instead, policy makers are buying up other kinds of debt securities, which has the effect of driving down the rates in those parts of the market.”
According to the Wall Street Journal, the program has already begun to work:
The Federal Reserve’s attempt to stabilize the housing market set off a chain reaction across the U.S. on Tuesday, dropping interest rates and quickly spurring a burst of refinancing activity by borrowers eager to lower their mortgage costs.
The program also highlights the importance of solid underwriting standards. The Fed doesn’t have to go through the process of evaluating the assets. That has been done according to agreed upon rules. So transaction cost are low and risk is understandable.
Such standards are exactly what is needed to monetization intangibles. As I noted in our report Intangible Asset Monetization: The Promise and the Reality:
The creation of underwriting standards, with or without liquidity guarantees from a GSE or other entity, would be an improvement over the current situation where each deal must be specifically and uniquely structured to meet the requirements of the credit rating agencies. The development of a widely understood template for intangible-backed securities would regularize the market and lower transaction costs.
As we move forward to reform the credit markets, let us take this opportunity to also to modernize them by explicitly creating a place for intangible assets. The place to start is with underwriting standards for the use of intangible assets as collateral for SBA loans. As I noted in the report, SBA’s treatment of intangible is uneven:
Given this spotty record, the SBA should undertake a review of laws and regulations to ensure that SBA loans can be used for the acquisition of intangible assets and that these intangible assets can be used as collateral for such loans.
Such a review would also present an opportunity for a larger look at the role of intangibles in bank lending. Thus, the SBA should also work with their commercial lenders to develop standards for the use of intangible assets as collateral, similar to existing SBA underwriting standards.
Such a review would start the process of unlocking that hidden wealth tied up in intangible assets — and create a new mechanism for financing innovation based on sound underwriting standards. It is past time to take this step.