Mortgage industry stakeholders say a new 50 basis point fee on some Fannie Mae and Freddie Mac securities runs counter to the premise of a uniform mortgage backed security.
It’s a “money grab,” said one industry analyst, who requested anonymity to stay on good terms with the government sponsored enterprises, who together back the majority of the single-family mortgage market.
Stakeholders argue this policy will damage the uniform mortgage backed security process, which allows two companies, Fannie Mae and Freddie Mac, to issue a common security composed of separate single securities. Multiple analysts, former FHFA and GSE officials contacted for this story requested anonymity to speak candidly and avoid damaging relations with the GSEs.
Fannie Mae and Freddie Mac declined to comment.
Since 2019, the GSEs, while entirely separate companies, have issued uniform securities. This is accomplished by repackaging existing single securities to issue Supers, or level 2, securities. Those can include securities backed by either Fannie Mae or Freddie Mac loans. Starting July 1, each enterprise will charge a 50 bps fee on the portion of the security made up of the other enterprise’s collateral.
Freddie Mac, in its press release, explained how the new policy would work. Starting July 1, if Freddie Mac were to create a $500 million Freddie Mac security from a combination of $200 million of Fannie Mae-issued commingled securities and $300 million of Freddie Mac-issued commingled securities, Freddie Mac would charge a 50 bps fee on the $200 million of Fannie Mae-issued collateral.
The move aligns with a portion of the new capital rule that assigns a 20% risk weight to securities issued by one GSE and included in securities created by the other. That policy is a holdover from the previous FHFA director, Mark Calabria.
An FHFA spokesperson said that the new fee is part of a “broad, comprehensive review of the Enterprises’ pricing framework,” which has so far focused on loan-level pricing. In light of the Enterprise Regulatory Capital Framework and associated capital planning rule issued earlier this month, the spokesperson said, the GSEs are “evaluating their long-term capital allocation strategies.”
The agency spokesperson also said the new fee will “not impact borrowers,” and will have “no anticipated impacts on UMBS liquidity, pricing, or execution.”
The Structured Finance Association, which represents stakeholders in the securitization industry, sharply disagreed with that assessment.
In a press release, the trade group said that the fee “appears to undermine the purposes of the UMBS, which risks impairing the fungibility of that security and the liquidity of the broader TBA market, thereby negatively impacting borrowers.”
The trade group urged Fannie Mae and Freddie Mac to “delay and reconsider” the impact of the fee on borrowing costs before implementing it.
Jaret Seiberg, a housing finance researcher at Cowen Washington Research, drew a connection between the new fee and the GSEs’ new emphasis on mission borrowers, in a research note he disseminated on Thursday.
“We have long known that FHFA Director Sandra Thompson is an affordable housing advocate,” Seiberg wrote. “Until today, we didn’t think her agency would push this part of the mission at the expense of market confidence.”
Other industry stakeholders, however, see no connection to the subsidization of mission borrowers. Seiberg did not return requests to comment.
Industry stakeholders had previously warned of this outcome, when the idea of a 20% risk-weight was first proposed, in 2020.
Ed DeMarco, president of the Housing Policy Council, wrote in an August 2020 comment letter on the Enterprise Regulatory Capital Framework that the 20% risk weight would “result in higher capital costs for the Enterprises, which would incentivize higher guarantee fees and lower returns on UMBS, both of which will lead to higher costs for homebuyers.”
“Despite these higher costs for market participants, there does not appear to be a corresponding risk reduction to the overall housing finance system,” DeMarco wrote.