The nation’s top banks purchased $20 billion of agency mortgage-backed securities in the fourth quarter as the mortgage portfolios of Fannie Mae and Freddie Mac grew worrisome for their regulator.

Wells Fargo (WFC) and Bank of New York Mellon (BK) are among financial insitutions making large purchases of new-issue MBS, according to analysis from Barclays Capital (BCS). The Federal Housing Finance Agency, however, warns of more mortgages becoming delinquent, especially in legacy private-label bonds the GSEs acquired before conservatorship.

The FHFA warns these loans threaten to drain liquidity from the GSEs while demand for new agency MBS paper is strong. Once a mortgage defaults, the loan is placed back on the balance sheet of the GSEs and becomes subject to more stingent capital requirements.

Treasury Department support agreements require the GSEs to shrink their mortgage portfolios at a rate of 10% per year, noted FHFA Acting Director Edward DeMarco in a plan he sent to Congress Tuesday on how to fix the nation’s mortgage finance market. Most mortgages the GSEs add to their retained portfolios are in fact delinquencies removed from their mortgage-backed securities.

The FHFA solution is to build a completely new infrastructure for the secondary market while contracting activities at Fannie Mae and Freddie Mac.

The lack of a private sector infrastructure that is capable of securitizing the $100 billion per month in mortgage originations threatens the nation’s credit and liquidity even further, the FHFA warned.

“Simply shutting down the enterprises would drive up interest rates and limit mortgage availability,” said the FHFA in a letter to Congress. “Thus, over time the Enterprises’ retained portfolios are becoming smaller, but also less liquid.”

DeMarco’s proposed guidelines, pending Congressional consideration, already hold the support of mortgage bankers.

“Moving towards a single security, aligning servicing requirements and reducing the retained portfolios while avoiding a fire sale are all moves that we have supported,” said president of the Mortgage Bankers Association, David Stevens. “We look forward to working with policymakers, including FHFA, to refine the roles of the GSEs and to bring private capital back to the market.”



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