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 said on a call
with 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, 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 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 bonds receive payments 45 days after borrowers'
payments are due, while Fannie's holders 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.
In a statement, 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
in a statement accompanying comments on the proposal said, "While
there are potential benefits from the proposal outlined in FHFA's
RFI, 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 are 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 that 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 "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.
Dave Lowman, head of Freddie Mac's single-family business, in a
statement said, "We strongly believe in the Single Security's
potential for expanding liquidity in the TBA [to be announced]
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, in a statement 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."
Write to Joe Light at joe.light@wsj.com
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