Since 2012, Fannie Mae [1] and Freddie Mac [2] have been working with the FHFA to create their common securitization platform (CSP) in order to manage the GSE’s securitization activities. These will eventually include the issuance of a single mortgage-backed security by both enterprises. The Urban Institute [3] recently released a report covering this move, and its progress.
A plan was developed to migrate Fannie Mae and Freddie Mac securitization functions to the CSP in two phases. The first phase, completed in 2016, covers functions related to data acceptance, issuance support, and bond administration for the issuance of Freddie Mac’s legacy fixed-rate, single-class securities. The second, scheduled to be completed in June 2019, would expand to handle the functions of the first, as well as several others, for issuance by both enterprises of a single mortgage-backed security, “including commingled resecuritizations of mortgage-backed securities already issued by Fannie Mae and Freddie Mac,” the report read.
Fannie Mae issues more securities each year than Freddie Mac, which has shown to make their securities more valuable. In addition, Freddie Mac has had to offer discounts to lenders a discount on the fee it charges for its guarantee, costing the enterprise close to $500 million a year in lost revenue. With this continued subsidization, it has been difficult for the organization to compete with Fannie Mae on equal footing, resulting in an undermining of what little competition already exists in “a system already compromised by the dominance of a duopoly.”
The unification of the two competing enterprises will result in a removal of that advantage, as well as make it easier for the transition into a system in which new competitors will raise the stakes. The unification would also allow for new entrants to overcome the monolithic advantage Fannie Mae would exert over the market.
The report concludes with the Institute noting the difficulty this transition would pose on the enterprises and the industry. After six years of effort, the FHFA and GSEs have created and followed through from plan to action, with the most significant change left being able to convince the industry that this move to single security will happen and that the enterprises are ready to take it head-on.
Read the full report here [4].