The Securities Industry and Financial Markets Association sent a letter to the Federal Housing Finance Agency asking it to merge more operations of Fannie Mae and Freddie Mac.
Concern lingers over the pricing gap between Fannie and Freddie mortgage bonds. 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 industry analysts.
“This liquidity differential impacts the overall cost and efficiency of the GSE securitization process, and their ability to fund mortgage lending optimally,” SIFMA Managing Director Richard Dorfman wrote. “Alignment will lay the groundwork for efforts to mitigate this performance gap, and SIFMA believes the GSEs have the ability to rectify many of the causes of this gap.”
The Mortgage Bankers Association is also pressuring FHFA to act on the pricing problem.
The FHFA already began merging the two servicing guidelines and loan-level data disclosures, and it is working on a plan to unwind their market shares to help more private capital back into the mortgage market.
“We appreciate SIFMA’s comments and are in the process of reviewing all the input received on FHFA’s draft Strategic Plan,” an FHFA spokesperson said.
SIFMA said more alignment is needed. Both companies, Dorfman wrote, should merge their underwriting systems, third-party origination policies and guarantee fee structures. He added new programs going forward should have the same implementation dates for both GSEs much like the Home Affordable Refinance Program expansion, which was implemented in March.
Dorfman also raised the issue of the Treasury Department‘s commitment to further bailouts. After 2012, new limits on support will be capped roughly $125 billion for Fannie and $150 billion for Freddie.
Both have pulled a combined $185 billion since entering conservatorship in 2008.
“This, at some point, could lead to MBS investors to view the creditworthiness of each GSE differently,” Dorfman wrote. “This would reduce homogeneity and overall liquidity. This could be resolved with cross collateralization or other means of sharing the guarantees.”
Congress continues to avoid widescale GSE reform, and it is unlikely any formal proposals will be considered before the end of the year. Dorfman said unhooking the mortgage finance market from government support and allowing private dollars to flow back in will not start until progress is made on Fannie and Freddie.
“The restoration of a nonguaranteed, private label securitization market will necessarily be preceded by the successful execution of a plan involving the MBS of the GSEs as they move through conservatorship,” Dorfman wrote.