FHFA Reveals Key Details on Future of GSE Securities

Mortgage & Real Estate









WASHINGTON The Federal Housing Finance Agency provided its first specifics Tuesday on how it intends to create a single security for mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

In a proposal open for public comment, the agency said it wants to draw on elements of both government-sponsored enterprises’ existing securities. The plan would create a single security that essentially mirrors most of Fannie’s pooling features, with “most of the disclosure framework” used by Freddie, the agency said.

The FHFA is seeking to end the pricing disparity between the two GSEs’ securities. Currently, Freddie MBS trades at a discount to Fannie’s, forcing Freddie to compensate investors for the difference in price and reducing its revenue. Freddie also charges a lower guarantee fee than Fannie to mitigate the impact on lenders.

FHFA Director Mel Watt said earlier this year that this pricing problem can no longer be ignored.

“Moving toward a single common security will improve liquidity in the housing finance markets,” the former North Carolina congressman said May 13 during his first major speech. “It would also reduce costs to the enterprises, particularly Freddie Mac. FHFA believes, however, this effort to create single security will take several years.”

The agency said it wants to ensure any changes won’t disrupt the TBA [To Be Announced] market where Fannie and Freddie securities are sold.

“FHFA is requesting public input on all aspects of the proposed single security structure and is especially focused on issues regarding the transition from the current system to a single security,” the agency said in a press release. “Specific questions FHFA is asking relate to TBA eligibility, legacy Fannie Mae and Freddie Mac securities, potential industry impact of the Single Security initiative, and the risk of market disruption.”

The comment period on the proposed single security structure ends Oct. 14.

Freddie chief executive Donald Layton recently told reporters that his company is “doing a better job” of minimizing the spreads between Fannie and Freddie securities.

“We worry about prepayment speeds being comparable to Fannie’s and things like that,” Layton said in discussing Freddie’s second quarter earnings.

Layton also noted a common security could be issued before Fannie and Freddie complete work on a common securitization platform. The single security “can be done through it or without it,” he said.

The two GSEs started work on a common securitization platform under the previous FHFA director Edward DeMarco.

In a statement issued after the FHFA’s release, Dave Lowman, a senior vice president at Freddie, called the proposal a “milestone on the path towards a more competitive and resilient housing finance system.

“We share FHFA’s vision of a more liquid and transparent single security that can make the secondary market even more efficient,” Lowman said.

The Mortgage Bankers Association also welcomed the plan.

“The move to a single security will enable the two GSEs to compete on a more level playing field, and this competition will be beneficial to both homebuyers and lenders,” said David Stevens, the group’s president and chief executive officer, in a statement. “For more than two years, we have been talking to the GSEs, policymakers and a broad array of stakeholders about the widespread benefits of a fungible, pooled, TBA-eligible GSE securities market. Today’s announcement takes what many told us was an unworkable fantasy and brings it closer to reality.”

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