Fannie Mae and Freddie Mac MBS should be combined into a single security, according to panelists at this week’s American Securitization Forum annual meeting being held in Washington, D.C.
This sentiment echoes those from participants of the recently concluded Mortgage Bankers Association secondary mortgage conference held in New York.
However, before this can be accomplished, panelists said that some steps must be taken to normalize the performance of the GSEs’ securities (i.e prepayment speeds), to eliminate operational variances (for instance, the GSEs’ fee schedules differ), to buy the same collateral and to have cross over guarantees.
At this point, the agencies’ “cost of funding does not make sense,” Matthew Tomiak, senior vice president at Bank of America, said.
Freddie Mac MBS pools have, for the most part, always traded at a concession to Fannie Mae securities.
Tomiak said that the aim is to “break the cycle and create a single security” that is “as homogenous as possible.”
A source who was at the conference said that Fannie Mae’s trading advantage is not supported by the fact that Freddie Mac bondholders technically get paid first.
Fannie Mae always pays bondholders on the 25th day of the month after the record date, which is always on the 30th of the previous month. Meanwhile, Freddie Mac securities pay on the 15th day of the following month.
There is also no legal impediment to creating a single agency security. Amy Williams, a partner at Hunton & Williams, said that both of the GSEs’ charters allow them to do so.
She added that how the division of the credit guaranty is executed can be decided internally for as long as investors perceive it as one credit.
Another idea that has been floated around is the creation of a third TBA bucket where the division would be: FNMAs, FHLMC Golds and FNMAs/FHLMC Golds together. However, Tomiak said that this would create a “trifurcation” where the third bucket will conceivably trade at the back of the two securities.
The source at conference said that this transformation into a single security might take around two years.