The delivery of certain coupons within the TBA MBS market were disrupted (or failed) in the wake of massive loan buyout plans unveiled by Fannie Mae and Freddie Mac last week.
These settlements are expected to be resolved soon, according to Credit Suisse researchers. The "fails," which represent situations in which a promised amount of securities cannot be delivered by the settlement date, have been seen in to-be-announced 5% and 5.5% MBS coupons. These higher premium coupons are prioritized in the buyout plans.
Credit Suisse researchers said in a report accompanying an investor call that they expect fails should move toward resolution as investors deliver more of the needed pools going forward. They see the buyouts of delinquent loans as ultimately a positive for the agency MBS market as they remove prepayment uncertainty, among other things.
That uncertainty is removed almost entirely in Freddie Mac securities due to its "one [month] and done" buyout plan. Fannie's multimonth buyout plan presents opportunities for short-term trades in those securities, said Mahesh Swaminathan, director and head of residential mortgage-backed securities for Credit Suisse.
In other GSE news, the nation's GSE regulator said that Fannie Mae and Freddie Mac will not provide their traditional support for the MBS market when the Federal Reserve stops purchasing agency MBS at the end of March.
The GSEs are already obligated to purchase up to $200 billion in delinquent loans out of their own MBS, according to GSE regulator Edward DeMarco.
"Given the size of the enterprises' current outstanding retained portfolios, and the potential volume of delinquent mortgages to be purchased out of guaranteed mortgage-backed security pools, it is my expectation that any net additions to their retained mortgage portfolios would be related to this activity," DeMarco said.
The acting director of the Federal Housing Finance Agency (FHFA) spoke at a Women in Housing and Finance (WHF) luncheon on Thursday. He stressed that FHFA is "committed to the principle of reducing" the GSEs' retained portfolios.
On Thursday, a Freddie economist said Fannie and Freddie have room in their portfolios to buy MBS if private investors don't return to the market. FHFA declined to comment on the economist's remarks. DeMarco told the WHF luncheon that the Fed's exit from the MBS market will be smooth.
"I expect that other private parties will begin to invest in new enterprise mortgage-backed securities as the Federal Reserve gradually withdraws its purchase activity," he said.
Since December 2008, the Federal Reserve has purchased nearly $1.2 trillion in Fannie, Freddie and Ginnie Mae MBS. The Fed has $55.1 billion remaining of its $1.25 trillion commitment to support the MBS market.