The Federal Housing Finance Agency (FHFA) – the entity that oversees mortgage giants Fannie Mae and Freddie Mac, which are currently in federal conservatorship and collectively constitute 71% of the mortgage market1 – recently completed a roadshow on its “Single Security” proposal, which would represent a significant change to the current mortgage market.
While we appreciate the primary goals of the FHFA proposal – increased liquidity and reduced costs to taxpayers – we have serious concerns about the proposal as is and worry that without significant modifications, it could actually lead to reduced liquidity, and more importantly, to higher mortgage rates for those purchasing a home and for those homeowners needing to refinance.
Given these reservations, we welcomed the recent FHFA announcement that it intends to delay the rollout of the Single Security to 2019. Not only should this additional time provide FHFA the opportunity to address some of the structural issues associated with the current proposal (outlined below), it hopefully will provide Congress the needed time to make progress on housing finance reform – a critical step, in our view, before the FHFA moves forward with the Single Security plan.
What is the Single Security proposal, and why is it being proposed?
Currently, Fannie Mae and Freddie Mac (“Fannie,” “Freddie,” or collectively the “agencies”) separately issue and guarantee mortgage-backed securities that are backed by pools of residential mortgage loans. For a variety of reasons, including historically faster prepayment speeds and reduced market liquidity, Freddie Mac securities consistently trade at a discounted price (and at higher rates) to those issued by Fannie Mae. Consequently, in order to induce mortgage originators to do business with Freddie Mac, the company has had to subsidize mortgage originators – called a “mortgage adjusted price” or “MAP.” Indeed, Freddie has spent hundreds of millions annually (billions cumulatively) on this subsidy, which has led to reduced profits to Freddie, and ultimately less money to the Treasury Department (since Freddie and Fannie currently sweep profits to Treasury under the 2010 Stock Purchase Agreement).
The Single Security proposal seeks to eliminate price differences between Fannie and Freddie’s securities, and therefore eliminate the need for Freddie to subsidize originators. This would be accomplished by creating a unified mortgage-backed security: New Fannie or Freddie securities would be issued under a Single Security structure, and existing Fannie and Freddie securities could be converted into the new structure. FHFA asserts that this Single Security would reduce costs while also increasing mortgage market liquidity by unifying the two markets.