Fannie-Freddie Overseer Proposes Uniform MBSJody Shenn
Fannie Mae and Freddie Mac’s overseer is proposing the government-backed mortgage giants eventually issue home-loan bonds that look the same, in a bid to boost liquidity in the market.
The Federal Housing Finance Agency is recommending that the new securities employ the structure of Fannie Mae’s bonds, such as payments to investors 55 days after borrowers’ bills are due, rather than the 45-day timeline at Freddie Mac, according to a proposal today from the regulator. Bondholder disclosures would be based on those currently used by Freddie Mac.
Home buyers, debt investors, lenders and taxpayers all have a stake in the effort to change the $5.4 trillion market for government-backed mortgage securities. The FHFA said each firm would guarantee its own notes, made of out loans that they acquire separately. The agency didn’t specify steps to require that the securities become interchangeable in trading.
“The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities,” the FHFA said in an e-mailed statement. In releasing a document called a “request for input,” the regulator said it “is especially focused on issues regarding the transition from the current system.”
Trading is now divided, with the two companies selling and backing separate securities. That can limit liquidity, pressuring the prices of smaller rival Freddie Mac’s bonds and potentially posing a broader threat if rising interest rates further slow issuance while pushing investors to unload holdings.
Fannie Mae guarantees more than $2.5 trillion of mortgage bonds, compared with about $1.5 trillion for Freddie Mac. The yields on their securities, which are being used to package about 60 percent of new loans, guide the mortgage rates offered to consumers by lenders.
The FHFA said the transition to a uniform security would be “a multiyear effort,” and that it doesn’t have a planned implementation date. Holders of existing Freddie Mac securities may be able to swap the debt for new notes, according to the document.
The idea of moving to a market in which the companies have interchangeable or linked securities has received public support from the Treasury Department and Mortgage Bankers Association. FHFA Director Mel Watt signaled in a May speech that he hoped to move faster on the firms issuing similar securities than the predecessor he replaced in January.
“Today’s announcement takes what many told us was an unworkable fantasy and brings it closer to reality,” David Stevens, president of the MBA, said in an e-mailed statement.
The effort may make it easier to wind down Fannie Mae and Freddie Mac, which were seized by the U.S. in 2008. Bipartisan legislation introduced in a Senate committee this year and endorsed by the Obama administration calls for replacing Fannie Mae and Freddie Mac with a single government mortgage-bond reinsurer that would pay claims only after private capital covers the first 10 percent of losses.
The proposal lays the groundwork for a market in which bond buyers’ contracts to purchase mortgage debt could be filled by either Fannie Mae or Freddie Mac notes, FHFA officials said on a conference call with reporters. Dealers and investors would need to agree to change current trading rules in which they specify the issuer for each trade.
The FHFA also said that Fannie Mae and Freddie Mac notes could be commingled in re-securitizations.
JPMorgan Chase & Co. analysts led by Matt Jozoff and Brian Ye said in an Aug. 1 note that they expected a request for comment that “would be consistent with the measured pace that Mr. Watt has taken thus far” in setting policy. The FHFA today asked interested parties to submit input by Oct. 13.
Trading volumes in Freddie Mac’s bonds that are a fraction of those of Fannie Mae have at times resulted in lower prices on the debt. That’s led Freddie Mac to rebate some of its guarantee fees to lenders that package mortgages into its bonds, reducing profits it turns over to taxpayers.
Risks of making the securities interchangeable in trading include potentially reduced demand, because some investors want to avoid Freddie Mac debt. Also some bondholders have limits on how much of their risk can be tied to a single issuer.
“We share FHFA’s vision of a more liquid and transparent single security that can make the secondary market even more efficient,” Dave Lowman, an executive vice president at McLean, Virginia-based Freddie Mac, said in a statement.
Andrew Bon Salle, an executive vice president at Washington-based Fannie Mae, said in a separate statement that the company is “committed to working with FHFA and Freddie Mac as we transition to a single security.”