The American Securitization Forum’s recent take on the theoretical single agency mortgage security concept highlights one potential move toward that end that looks more near-term possible than some others, although the trade group acknowledges even this runs up against some challenging roadblocks.
Among other things, the ASF suggests a regulatory directive for Freddie to outsource its loan delivery mechanism to Fannie.
This appears to be one of the more easily accessed concepts—at least in relatively and in theory.
As previously noted by this publication, government-sponsored enterprise executives on a panel at the Mortgage Bankers Association’s secondary market conference earlier this year seemed more inclined toward a regulatory goal that targets a common mortgage-backed security platform for their securities than a common MBS, per se.
Plus, as the ASF’s white paper on the topic last week and an earlier article on this publication’s website pointed out, there gets to be some diverging opinions between originators and investors about the degree to which differences between the two agencies should be eliminated.
Each faction has a point. Originators ask: Do you really want to eliminate the Fannie vs. Freddie competition for loan product accommodated by differences in their pricing, which helps keeps costs lower for consumers? At the same time, investors ask: Do you really want to just maintain the differences between the two agencies that make it hard to do anything about the securities’ relative pricing inefficiencies?
The paper does a good job of consolidating some of the numbers that illustrate those inefficiencies, so I’ll recap some of them here.
As a regulatory report cited in the ASF paper shows, historically Freddie pools have traded at a discount to Fannie’s, with Freddie providing loan sellers a lower guarantee fee or some other incentive to make up for it, thus producing the competition originators are loath to give up. On June 12, for example, Freddie 4.5s and 3.5s were trading, respectively, 48 cents and 23 cents lower than Fannie equivalents. Put another way, the ASF notes that originators who delivered to Freddie that day experienced a relative loss in the market for their loans of $4.8 million and $2.3 million, respectively, for every $1 billion of originations they sold into 4.5s and 3.5s. (Although the aforementioned incentives likely help offset this.)
Just outsourcing delivery to Fannie may not do much when it comes to this pricing inefficiency, but it’s a start and, again, it is in line with the common platform idea GSE executives seem most responsive to.
How attractive this would look to Freddie Mac is questionable, but the ASF’s paper does suggest its regulator and taxpayers might like the way it puts the GSEs at least on a path that might reduce the pricing inefficiency someday.
The trade group also notes that originators have suggested there could be firewalls that keep guarantee fee pricing confidential.
Issuance market share figures do suggest that while Fannie tends to dominate, a trend that intensified late last year, the ability to compete to some extent does bring Freddie to a point where it sometimes gives Fannie more of a run for its money than others.
Calculations in the ASF paper based on Securities Industry Financial Markets Association data show that Freddie Mac’s issuance in 2011 was 34% of the market, the lowest share since the two began issuing in the same year. This was even more pronounced in December when its percentage was 19%, according to Deutsche Bank Securities. But so far Freddie’s monthly share this year has been as follows through May: 35%, 42%, 31%, 38% and 28%.
