The American Securitization Forum (ASF) said in a white paper it released today that the single securitization platform for the GSEs outlined by the Federal Housing Finance Agency (FHFA) in its strategic plan could eliminate the pricing disparity that exists among the two agencies.
"Eliminating market inefficiencies through a single agency security should result in lower mortgage rates for borrowers and reduced costs to American taxpayers," explained Tom Deutsch, executive director of the ASF. "Creating a single security should result in better execution, the benefits of which would be passed on to consumers in the form of lower interest rates and taxpayers in the form of reduced losses."
The ASF said in its white paper that while the proposal for a single agency security has the possibility to eliminate pricing discrepancies, both agencies would have to first standardized their procedures on issues such as loan delivery and pooling requirements, underwriting guidelines, servicing standards, and disclosure policies.
Of particular concern are the guarantee fees that are currently set by each agency. Freddie typically presents mortgage originators with a discounted fee in order to stabilize the pricing differential between the securities.
Investor members of the ASF believe that if the GSEs are allowed to continue to set the value of the fee individually, it could lead to some discrepancies when it comes to valuing the single security.
Another issue that has created some discord among ASF members is whether to identify the underlying GSE issuing the single security.
On the one hand, ASF investors members argue that the underlying GSE should be identified since Fannie Mae and Freddie Mac will eventually have different risk profiles, despite the fact that both are currently supported by the U.S. government. Whereas ASF originator members argue that the new single security should not identify the underlying issuer if standardization between the two agencies is successful.
"These are steps that need to be taken, but perhaps just as importantly, we believe they can be accomplished in the near term by FHFA without the need for any additional Congressional action," Deutsch added.
Originators prefer dealing with separate GSEs and g-fee pricing that are based upon perceived seller financial wherewithal and quality of loans, explained Barclays Capital analysts in a securitization report released today.
"Investors believe that the securities will not be fully fungible unless g-fee structures are standardized. They believe that g-fee competition would lead to prepayment differentials, which would lead to inconsistent performance across securities," they said.