Fannie Mae and Freddie Mac are a step closer to issuing a
combined mortgage-backed security that would fundamentally overhaul
one of the largest bond markets and, officials say, could reduce
borrowing costs for homeowners.
On Friday, the mortgage-finance companies and their regulator,
the Federal Housing Finance Agency, gave an updated description of
the attributes of the so-called single security, a new type of
mortgage-backed security that would replace the separate MBS
currently issued by Fannie and Freddie.
The companies and the agency are on track to complete the single
security's structure by the end of the year, and the security will
be rolled out over several years, an FHFA official told reporters.
The update came in response to industry feedback after the FHFA
proposed the security's structure last August.
Although the creation of a new security will have the most
direct impact on bond traders and investors, its implementation
also will affect taxpayers, who ultimately back payments on the
bonds, and mortgage borrowers, whose interest rates are determined
in part by the securities' prices.
Fannie and Freddie guarantee about $5 trillion in bonds combined
and, along with the Ginnie Mae, back the vast majority of the U.S.
mortgage market.
FHFA officials said they expect the new securities to decrease
borrowers' costs, since the combined market for a single security
would be larger and more liquid than Fannie's and Freddie's
separate MBS markets. The magnitude of any reduction wouldn't be
known until the bonds actually trade, but likely would be
slight.
The FHFA proposed the structure of the new mortgage-backed
security last August, outlining an MBS that largely would have the
same features of Fannie Mae bonds with the same bondholder
disclosures as those of Freddie Mac.
Now, Freddie bondholders receive payments 45 days after
borrowers' mortgage payments are due, while Fannie's bondholders
wait 55 days. Under the new security, MNS holders would get
payments on the bonds 55 days after borrowers' payments are
due.
Although both companies are backed by the government, right now,
Fannie and Freddie issue separate securities. Because the market
for Fannie's securities is larger, they tend to get more favorable
prices from investors. That leads Freddie to provide rebate fees to
lenders who package its bonds, reducing the company's profits.
FHFA Director Mel Watt described the update as "another
significant milestone we have reached in defining the structure and
processes necessary to transition successfully to a Single
Security."
Mortgage investors generally have been wary of the change. In
October, the Securities Industry and Financial Markets Association
said: "While there are potential benefits from the proposal
outlined in FHFA's [Request for Information], there are also
significant risks if the proposal were not implemented with
appropriate caution, planning, and most important, broad
understanding and support from a range of market participants."
Among Sifma's concerns were making sure the identity of the
entity backing payments on the bonds is clear and ensuring that
holders of legacy mortgage-backed securities are compensated for
any sacrifices shifting to the new mortgage bonds.
To that end, Friday's update said Freddie Mac would compensate
investors who exchange its legacy mortgage-backed securities, which
have a 45-day delay on payments, to the new securities with the
longer delay.
Sifma sets the standards for what mortgages can be packaged and
sold to investors in the so-called to-be-announced mortgage market,
which allows investors to trade securities considered homogenous
without knowing the underlying loans' specific attributes.
The TBA market is also what allows borrowers to lock in interest
rates well before a loan closes. That makes the association's
signoff on the final attributes of the single security crucial to
its success.
On Friday, Sifma executive vice president Randy Snook said the
association would review the updated proposal over the next few
days. "As stewards of the TBA market, Sifma places a very high
priority on FHFA's effort and in ensuring that the benefits of the
TBA market to mortgage borrowers, lenders, and secondary market
participants are preserved."
Dave Lowman, head of Freddie Mac's single-family business, said:
"We strongly believe in the Single Security's potential for
expanding liquidity in the TBA market, lowering housing finance
costs and making the housing finance system more competitive and
resilient."
Andrew Bon Salle, Fannie Mae's executive vice president of its
single-family business said: "We will continue to work with FHFA,
Freddie Mac, and CSS to ensure we transition to the Single Security
in a safe and sound manner." Common Securitization Solutions LLC is
a joint venture of Fannie and Freddie that is developing a platform
through which the companies, and eventually third parties, can
issue common securities.
Write to Joe Light at joe.light@wsj.com
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