Investor eyes GSE merger alternative to trim secondary costs

Following a recent surge in rate-indicative bond yields that could make lending more expensive, one prominent investor in two government-sponsored enterprises is renewing his push for a GSE reform that could lower secondary mortgage market costs.

Investor Jon Oksenholt's plan mines merger ideas officials have explored, including the Great American Mortgage Corp. and U.S. Financial Technology, the enterprises' joint venture common securitization platform. It also references another investor's earlier idea for a GSE merger.

While previous proposals to merge Fannie Mae and Freddie Mac ran into opposition, Oksenholt suggests a variation aimed at maintaining competition and adding efficiency through a GSE parent company called "U.S. Financial Technology and Mortgage Corp." [USFTMC] or "TopCo."

"USFTMC could potentially lower costs, improve capital-market efficiency and preserve the government protections that help keep mortgage rates down," Jon Oksenholt, who owns both Freddie Mac and Fannie Mae stock, wrote.

How to make USFTMC fit with existing policy and industry aims

Oksenholt, who currently holds seven figures worth of Freddie Mac common shares and junior preferred stock from both enterprises that numbers in the hundreds of thousands, said he considered officials' policy aims in drawing his plan up, but makes no claim they back it.

His focus on lowering mortgage rates is aimed at addressing moves by officials that have suggested this goal has taken precedence over earlier plans for the new "Great American Mortgage Corp." public offering for GSE shares.

Some investors like Oksenholt, who hold stock in the GSEs that have been held in conservatorship since 2008, have been hoping such an offering could potentially benefit them, possibly by deeming the enterprises' public stake repaid by Fannie and Freddie's more recent profits.

There's some disagreement between private and public interests on this idea, which Oksenholt calls for his illustrative restructuring plan, but his broader concept is generally in line with policymaker and industry consensus.

The parent company structure addresses the Mortgage Bankers Association's opposition to the idea of creating efficiencies through a single entity that limits competition by keeping two  subsidiary entities beneath it in place.

By building off the JV that supports uniform trading of Fannie and Freddie's securities for the parent company concept, Oksenholt looks to leverage a proven middle ground through which the GSEs have been able to share operations while competing separately on other levels.

"It is not precedent for the whole transaction, but it is useful evidence that important shared functions can sit in a state-law entity inside a Fannie/Freddie structure," he wrote. 

The parent entity would solely be used for operations that could be combined to produce efficiencies without disrupting competition between the GSEs to buy lenders' mortgages or the implicit government guarantee policymakers have pledged to protect to keep rates from rising.

"Shared infrastructure shouldn't become a back door for either company, or the parent, to obtain the other's competitively sensitive information or influence its competitive decisions," Oksenholt wrote.

Oksenholt's plan in part relies on a Sept. 7, 2028 expiration deadline for the Treasury's GSE warrants to drive action. However, Treasury has noted that this deadline could be extended if needed to prevent an exit from conservatorship that could disrupt the market.