The FHFA has continued its strategic rewrite of Fannie Mae and Freddie Mac, now turning to combining agency mortgage-backed securities, which each currently issues in different ways, into two tiers of common securitized instruments.  The first level would be a single MBS that combines securities structured separately by each of the GSEs. The second level would be resecuritized structures that commingle these separate instruments.  The new single agency MBS would take years to issue due to fears that the transition would destabilize the to-be-announced (TBA) market and thus undermine credit availability and/or increase cost. However, legacy Freddie Mac securities would be folded into the new ones that are modelled largely on those now issued by Fannie Mae. The longer this takes and the higher interest rates climb during this transition, the more complex it will become for legacy PCs to convert into single RMBS.  The new, single agency instruments should nevertheless reduce pricing disparities between the two GSEs and otherwise increase market efficiency. It may, however, also raise questions about the need for two separate GSEs, especially as FHFA puts in place the common securitization platform (CSP) also being developed for a restructured secondary-mortgage market that will presumably someday rely far more on non-GSE issuances. 

The full report is available to retainer clients. To find out how you can sign up for the service, click here