The Mortgage Bankers Association is calling for a merger of Fannie Mae and Freddie Mac’s mortgage bonds both as a “first step” in transitioning into a single security. The change would save taxpayers billions and ensure a liquid and stable housing finance system, the group believes.

The idea has been kicked around Washington for well over two years now with no progress being made at the Treasury Department and the Federal Housing Finance Agency.

Currently, Freddie Mac PCs trade lower than Fannie Mae’s MBS. Therefore, they aren’t as liquid, and trading volume in them is significantly smaller. And according to the MBA, taxpayers subsidize the difference. Consequently a single security makes sense, the trade group said at its National Secondary Market Conference in New York.

Moving to a fungible, pooled TBA-eligible securities market will benefit everyone involved, MBA president David Stevens said. “There will be more liquidity,” he told the conference. “And taxpayers will be saved hundreds of millions of dollars.”

But it’s not only about the money, Stevens added. It’s also about “providing a more flexible and efficient way of trading securities.”

The MBA executive said it is imperative to make the switch now, while interest rates are low. He conceded that there will be some “bumps” to overcome, but he said the changes the group envisions no not require legislation.

“We recognize that some areas may be at a competitive disadvantage at first, but the market will recover quickly due to the liquidity and flexibility of the combined pools,” Stevens predicted in opening the three-day conference.

Under the MBA proposal, each GSE would still issue its own notes. But their bonds could be pooled into the same TBA security.

Fannie Mae would have to give up its market advantage, MBA officials said, and investors who already own Fannie’s securities are likely to see the value of their holdings fall, at least initially.

But the “risk is lower” and the “market will recover quicker” if the transition takes place now while mortgage rates are low, Stevens said.

According to MBA economist Michael Fratantoni, about $200 billion in Fannie Mae securities trade daily versus some $10 billion in Freddie Mac bonds.

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