Pitfalls of FHFA’s Plan for a Single Mortgage Security
By Brian Collins

While the financial services industry is solidly behind a Federal Housing Finance Agency plan to create a single structure for Fannie Mae and Freddie Mac securitizations, the proposal also carries significant risk. The agency provided key details this week on how it wants to move forward, saying it will be a “multi-year” effort. But some in the industry fear that is too slow, arguing the regulator needs to speed up the process while the Federal Reserve Board is still keeping interest rates low. The proposal would unify the structure of both government-sponsored enterprises’ mortgage-backed securities, which theoretically would improve the pricing of Freddie’s MBS. Fannie MBS is considered the benchmark in the securities market due to its volume and structure. Fannie issued $161.2 billion in MBS during the first half of this year, compared to Freddie, which issued $107.7 billion in PCs during the same six-month period. In terms of pricing, Freddie charges a 56.7 basis point guarantee fee, compared to Fannie, which charges 62.6 basis points. As a result, industry representatives and analysts see more potential disruption to Freddie in the FHFA’s plan. “Key to the FHFA approach now is to take great care not to do anything to the TBA market or to destabilize Freddie along the way” to a single MBS, wrote Federal Financial Analytics in a note to clients issued on Wednesday.  FHFA will have to make sure the handover of the old PCs to the new MBS does not “undermine Freddie’s ability to purchase mortgages before the transfer date or stay viable thereafter,” said the note, which was entitled “Kiss Your PC Good-Bye.”