Freddie’s PC Blues

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WE’RE HEARING that the declining liquidity of Freddie Mac mortgage-backed securities is raising concerns in Washington and on Wall Street.

The GSE is buying more of its MBS, which Freddie calls participation certificates, to prop up the price. Freddie chief financial officer Ross Kari told reporters recently that PCs are facing “declining liquidity and higher bid-offer spreads than we are used to.”

Freddie purchased $50.3 billion in participation certificates during the first six months of 2013, compared to $15.6 billion in the same period in 2012. And the cost of this subsidization is getting expensive.

The Mortgage Bankers Association has been warning about this PC problem for some time. The Securities Industry and Financial Markets Association is also concerned. And Treasury Department officials are getting involved, according to a report by mortgage strategists at Bank of America Merrill Lynch.

SIFMA been talking with the various parties about possible solutions that might narrow the gap between the pricing of Fannie Mae MBS and Freddie PCs in the TBA (to be announced) market.

“Incentives have aligned across the U.S. Treasury, Freddie Mac and the Mortgage Bankers Association to seek a timely resolution to the relatively weak liquidity of [Freddie] Golds,” the Bank of America Merrill Lynch strategists said.

Strangely, the GSE regulator does not seem an interested party.

When asked about this pricing issue several weeks ago, a Federal Housing Finance Agency spokeswoman said the agency is mainly focused on creating a single securities platform for Fannie Mae and Freddie mortgage securities. But that effort to build a single platform could take years.

Meanwhile, Freddie is spending billions to subsidize its PCs.

But we did learn this week that Fannie lenders pay a higher guarantee fee than Freddie lenders. The difference is about 7 basis points. Maybe that's the FHFA's way of helping Freddie remain competitive with its seller/servicers.

BLOG OF THE WEEK: John McDermott’s blog on payday lenders, comparing them to subprime mortgage lenders. We say pick-em on this comparison, it’s close. Apparently payday lenders lost a round on the benefits of their association with American Indian tribes. Payday lenders have been accused of teaming up with these sovereign nations to get around some rules and regs. This has been a divisive issue, with some tribes saying don’t tell us what we can do with sovereign powers, that’s up to us, with consumer advocates saying, yes but this could be predatory lending. Here’s a crash course on Indian sovereignty. They are cited in the Constitution along with state governments, so they are considered equal to states and exempt from a good bit of the law of the states they are in. (This has caused friction as you might imagine!) They are, however, wards of the federal government and must obey all the many thousands of federal rules and regs.

MOST READ/MOST EMAILED: Both of these categories are for the same item this week, concerning mortgage tech provider Ellie Mae looking for a buyer. Ellie Mae was last year’s biggest winner on the New York Stock Exchange (CEO Sig Anderman got to ring the opening bell back in February) so the company seems to be doing well. We’ll see what the market has to say as Ellie seeks an advisor. The company recently raised its estimate of earnings to 30% higher than last year, pretty sweet.

OH, THOSE VINERS: Our mortgage discussion group at www.mortgagegrapevine.com has a wide array of interests. This week instead of working they talked about climate change. They were, how should we say, a little skeptical of whether it is true or not. (Any time the weather turns cool, as it has delightfully in New York these past three days, that’s cited as disproving the climate change paradigm.) We hope none of their offices are on the waterfront! We wish the Viners would get active on this topic because then it would disprove the old saying, everybody talks about the weather, but nobody does anything about it!

MEANWHILE: On the topic of climate change, we published an interesting piece on coastal real estate and the difficulty of getting good flood insurance determinations as sea level changes (rises is the dominant direction). Author Brad Warren is a climate change journalist and a correspondent of ours going back a quarter of a century. Good to see his byline again.

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.