This was that last fhfa update in May, background info. This is just clarifying the single security question.
Background
Fannie Mae and Freddie Mac each issue and guarantee mortgage-backed securities backed by pools of single-family mortgage loans. The securities issued by Fannie Mae are known as Mortgage-Backed Securities (MBS), and the securities issued by Freddie Mac are known as Participation Certificates (PCs).
Most trading of Fannie Mae MBS and Freddie Mac PCs backed by fixed-rate mortgage loans occurs in the “to be announced” (TBA) market, which is a type of forward market in mortgage- backed securities.1 The actual security to be delivered to fulfill a TBA trade is not designated at the time the trade is made. Rather, on the trade date, six criteria are agreed on: the issuer, the maturity, the coupon rate, the face value, the price, and the settlement date. The specific securities delivered to complete the trade are “to be announced” 48 hours prior to the settlement date. Those features of the TBA market create a very efficient system for forward trading in mortgage-backed securities. The liquidity of the TBA market provides benefits to borrowers in the form of lower mortgage rates, more efficient lending processes, lower transaction costs, and the ability to “lock in” the interest rate on a fixed-rate mortgage prior to closing the loan.2
The objectives in developing a Single Security are to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans and to maintain the liquidity of this market over time. Achievement of those objectives would enhance the liquidity of the TBA market and further FHFA’s statutory obligation to ensure the liquidity of the nation’s housing finance markets.
Another objective of developing a Single Security is to reduce the costs to Freddie Mac and taxpayers that result from the persistent difference in the liquidity of MBS and PCs. Historically, TBA-eligible Fannie Mae MBS have been much more liquid than comparable Freddie Mac PCs. By dollar volume, annual issuance of MBS has exceeded issuance of PCs by about 70 percent in recent years, whereas the trading volume of MBS has been about nine times that of PCs. Also, MBS generally trade at higher prices than PCs that pay the same coupon rate and are backed by comparable loans. Further, the movement of individual large investors in and out of the market has a greater impact on the prices of PCs and results in those prices being more volatile.
The greater liquidity of Fannie Mae’s securities results from investors’ preference for using MBS for hedging and as benchmarks for setting the prices of other mortgage securities and setting the rates on fixed-rate mortgages. Lower liquidity and prices of PCs result in Freddie Mac spending significant sums each year to subsidize the guarantee fees it charges sellers to induce sellers to do business with Freddie Mac. This imposes a significant cost on Freddie Mac and, ultimately, on taxpayers, since it lowers the dividend payments by Freddie Mac to the Department of the Treasury under the Senior Preferred Stock Purchase Agreement.
