The mortgage industry’s largest trade group proposed the Federal Housing Finance Agency allow for Fannie Mae and Freddie Mac mortgage bonds be pooled together on the TBA market in order to eliminate trading disparities between the two.
“In order to ensure long-term growth, stability and liquidity, the GSEs should eventually transition into a single security,” said Mortgage Bankers Association CEO David Stevens at the group’s secondary conference in New York Monday.
Freddie bonds trade lower than Fannie securities. They are less liquid and the trading volume is significantly less, forcing taxpayers to subsidize the difference in cost, otherwise there would be little to no issuance of Freddie securities.
According to the MBA, roughly $10 billion in Freddie bonds trade every day, compared to $200 billion in notes guaranteed by Fannie.
“The cost is more,” Stevens said in a briefing with reporters following the speech. “And the taxpayer subsidizes the lender for the difference between the two. Taxpayers will be saved hundreds of millions of dollars because the execution will no longer be subsidized.”
Stevens proposed making the shift while Congress remains gridlocked and GSE reform remains elusive.
The idea would still allow Fannie and Freddie to issue their own notes, but allow issuers to pool them into the same TBA contract.
There would still be some hurdles. Fannie would have to give up its market advantage. Also, investors who already own these securities will likely see the value of their holdings drop, but Stevens said if it is to be done, the move should happen during the historically low interest-rate environment to keep the transition less painful.
But most importantly, Stevens said, it would be a way for the FHFA, which proposed renewed efforts to privatize the housing finance system in February, to take a step forward without Congress. The agency already began aligning the two servicing rulebooks last year.
“This action doesn’t require legislation,” Stevens said in his speech. “We can do this right now to the benefit of taxpayers, homeowners, the mortgage market system and the economy.”