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The call for the end of both Fannie Mae and Freddie Mac along with a trend by the government to sever ties with public sector entities and promote a single securitization platform has prompted investors to wonder about the potential effects on securitized markets.
The Federal Housing Finance Agency plans to sell 5% of the illiquid portion of the retained portfolio, meaning the collateral the government-sponsored enterprises had before the conservatorship. This could mean up to about $35 to $40 billion of sales, according to Barclays securitized product research report.
The GSEs divided their retained portfolio into three parts based on liquidity with agency MBS holdings classified as the most liquidity, Barclays noted in its U.S. MBS instant insights report.
"Given the requirements on operational control, we do not expect the sales to be at a rate that depresses non-agency prices dramatically. As a result, the risk of non-agency prices falling due to agency sales is pretty small, in our opinion," Barclays said.
As a result, investors are asking for access to the retained portfolio to see if it’s a good investment. However, because the GSEs are not a typical corporate institution, they do not have to disclose to investors what collateral is in the portfolio, according to Interactive Data, a leading global provider of financial market data.
"Given the complexity and uncertain nature of the mortgage-backed asset class, private sector investors have been on a four-year push for more information to help them better understand the legacy assets on their books and make informed decisions going forward," the market commentary said.
Furthermore, Fannie Mae, Freddie Mac and Ginnie Mae have been pressured to offer additional loan-level data to MBS investors, Interactive Data noted.
Although Interactive Data analysts suggest that great efforts have been made to increase transparency for MBS guaranteed by both Fannie Mae and Freddie Mac, very little progress has been made to provide detailed disclosure regarding the securities the GSEs hold in their retained portfolio.
"We therefore, advocate for individual security level disclosure, which we believe should be modeled after the Maiden Lane I,II, and III programs initiated by the New York Fed during the financial crisis and retired last year," according to the commentary note.
On a similar note, President and CEO David Stevens of the Mortgage Bankers Association called for a further need for clarity of GSE reform in regards to acting director Ed DeMarco of the FHFA’s concept to a single-securitization platform, which he mentioned during a speech on the future goals of the GSEs.
"This latest proposal of a single platform and a new entity (owned and funded by Fannie Mae and Freddie Mac) to manage it, is just one piece of a much larger puzzle that impacts borrowers, lenders and the market as a whole," Stevens said.
He added, "Proposals of this magnitude need a transparent process to engage with stakeholders, articulate objectives and alternatives, and demonstrate that stakeholder concerns have been evaluated and addressed."
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