Fannie Overseer Said to Plan Report on Single Bond SalesJody Shenn and Clea Benson
Fannie Mae and Freddie Mac’s overseer may release a report as soon as next month on its goal of getting the government-backed U.S. mortgage giants to issue a single set of home-loan bonds, according to three people with knowledge of the matter.
The Federal Housing Finance Agency would then seek input from the public on its analysis, said the people, who asked not to be named because the plan is private. Fannie Mae guarantees more than $2.5 trillion of mortgage bonds, compared with about $1.5 trillion for Freddie Mac. The two were seized by the U.S. in 2008, and their futures remain uncertain.
Moving to a market in which both companies are issuing common securities may have implications for everyone from home buyers and lenders to taxpayers. Having each entity sell separate securities divides trading, reducing liquidity. That’s been especially damaging to the prices of Freddie Mac notes and may prove even more troublesome to the market as rising interest rates slow sales and push investors to try and unload holdings.
The idea has received public support from the Treasury Department and Mortgage Bankers Association, and FHFA Director Mel Watt signaled in a May speech he hoped to move faster on the issue than the predecessor that he replaced in January.
The FHFA “put a stake in the ground that we can do something toward that need while we’re in conservatorship,” Bob Ryan, a special adviser to Watt at the FHFA, said at a conference in May. Still, “the single security is a multi-year effort. It’s not going to happen this year, it’s not going to happen next year. It’s going to take a while.”
Peter Garuccio, a spokesman for the FHFA, declined to comment, as did Andrew Wilson of Washington-based Fannie Mae and Brad German of McLean, Virginia-based Freddie Mac.
A daily average of $121.6 billion of Fannie Mae securities traded in the main part of the mortgage-bond market during the first quarter, compared with $14.3 billion for Freddie Mac debt, according to data compiled by the Financial Industry Regulatory Authority.
Slower trading in Freddie Mac notes has at times led the debt to trade at lower prices than securities issued by larger rival Fannie Mae. That’s led Freddie Mac to rebate some of the fees it charges for guaranteeing the debt to lenders that package mortgages into its bonds in order to support its market share, reducing the profits it turns over to taxpayers.
Risks of combining the securities include reduced demand because some investors want to avoid Freddie Mac debt. Limits on investor holdings from single issuers may also hurt values.
Prices of Fannie Mae and Freddie Mac securities, which are being used to package about 60 percent of new loans for sale, guide the mortgage rates offered to consumers by lenders.
Watt said in his first public speech since replacing Edward J. DeMarco at the FHFA that he would make moving toward a single security an objective.
The step should “improve liquidity in the housing finance markets,” and “reduce costs to the enterprises, particularly Freddie Mac, since Freddie’s securities have historically traded at a disadvantage,” he said.
The FHFA is separately examining potential shorter-term moves to deal with any renewed weakness in Freddie Mac’s notes, Ryan said in May.
“Linking the two securities” would also help prepare the $9.4 trillion home-finance system for the future model envisioned by the Obama administration and a bipartisan group of lawmakers, Michael Stegman, the Treasury’s top housing official, said in a January speech.
“We think it is worth pursuing and are looking to find a workable solution that would not disrupt markets,” he said.
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