I think we are mostly in agreement, davelj. I suppose I am a little more suspicious that the 50bp GSE ‘advantage’ can be boosted by govt action in two ways, thereby making conforming loans more valuable and the conforming limit more important. My half-century on this planet has probably just made me too cynical.
What are those 2 ways? The GSAs have to charge at least the long-term default rate on the loans so they can break even. Above that, they charge for risk.
The government can and does manage the risk charge down, by implicitly guaranteeing GSA bonds, and by allowing them to run on very low capital. They can manage it down further by allowing them to hold even less capital, or hinting more strongly that they’ll stand behind the GSAs in a crisis.
They can manage the charge for the long-term default rate down by saying that they’ll step in in a ‘crisis’ to subsidize the GSAs. Since most default costs over several economic cycles are incurred in the darkest depths of downturns, this effective reduction in the cost to the GSAs of the defaults could be dressed up as govt just doing what it should do – stepping in when all else fails.
