The Federal Housing Finance Agency (FHFA) may soon be unveiling its plan for getting government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to issue a single set of residential mortgage-backed securities.
According to a Bloomberg News report, citing un-named sources, the FHFA will seek input from the public on the proposed plan once it is introduced – which could come as soon as next month.
Mel Watt, director of the FHFA, announced the agency's intention to get the GSEs onto a single securitization platform when he unveiled the agency's revamped strategic plan for 2014 in May. The strategic plan consists of three basic parts: Maintaining credit availability and foreclosure prevention activities; reducing the GSEs' risk in terms of taxpayer exposure; and building a new infrastructure for the secondary mortgage market.
In general, the plan puts a stronger emphasis on bringing private capital back into the mortgage market but reduces the FHFA's focus on transitioning the GSEs out of conservatorship.
As part of that plan, the FHFA has directed the GSEs to accelerate their project to build a common securitization platform – which could take years.
In October, the FHFA announced that the GSEs had formed a joint venture to build and operate the new platform. In addition, it established a new technology company, Common Securitization Solutions, to develop and operate the new platform.
However, Watt said in his speech in May that for practical reasons, the new platform it will initially be limited to supporting only the GSEs, instead of a wider constellation of securitizers.
The initial lofty goal of building a platform that would be truly universal and rolled out all at once was simply too risky, he explained, due to the potential disruptions to the market that could take place during the transition. What's more, with housing finance reform still unresolved, there could be challenges in developing a platform that would properly meet the needs of the future market.
‘Moving forward, we will focus our efforts on creating a common securitization platform that can undertake Fannie Mae and Freddie Mac's current securitization operations,’ Watt said in his May speech. ‘A successful outcome will be a seamless transition from the current in-house systems that issue new securities at each enterprise to a future joint venture owned by Fannie Mae and Freddie Mac that operates one system with updated technology.’
Moving the enterprises to a single common security, ‘will improve liquidity in the housing finance markets,’ Watt said. ‘It would also reduce costs to the enterprises, particularly Freddie Mac, since Freddie's securities have historically traded at a disadvantage compared to Fannie Mae.’
The challenge, he said, would be defining the security's parameters along with shared contractual and disclosure requirements.
As the Bloomberg News report explains, moving to a single security could disrupt the market in several different ways. For example, it could result in reduced demand from investors, who may want to avoid Freddie Mac debt.