Who is really helped by regulatroy changes in the mortgage biz?

Implications: OFEO recently announced that it is lowering GSE capital requirements to enable Fannie Mae and Freddie Mac to buy more loans and provide added liquidity to the mortgage market.  The Fed has also lowered interest rates.  So why haven't consumers responded and housing prices stabilized? While these changes may inject some liquidity into the mortgage market, the gains are likely to be offset by higher risk premiums and increasingly tougher underwriting guidelines. Fannie Mae and Freddie Mac have recently raised guaranty fees and tightened underwriting guidelines.  At the same time, the mortgage insurers have raised rates, tightened underwriting guidelines, eliminated programs and increased down payment requirements. The FHA has also announced price increases and new risk-based pricing formulas. The result is that fewer consumers will qualify for a mortgage, and those who do qualify will pay more to get their loans guaranteed.  This may extend the current housing crisis.

Analysis: The biggest  beneficiaries of many of the systemic changes occurring in the mortgage industry are not the consumers but the GSE's and  mortgage insurance companies (MTG, PMI, RDN, and GWN).  Most of these companies are well capitalized and are likely to weather their current losses.  They will emerge from the crisis stronger and more profitable. 

Most of these companies are currently selling at enormous discounts to book value.  These discounts are due to investor fears concerning earnings dilution as these companies raise capital to recover credit ratings and build loan loss reserves, coupled with a fear of continued or increasing loan losses. 

While shareholder and book value will decrease in the short term, this situation is likely to be offset in the long term by better pricing, increasing persistency, and a higher quality book of business.