Mortgage Industry Pushes for Unified Fannie, Freddie Securities

Plans to unify mortgage securities issued by Fannie Mae and Freddie Mac have been top of mind at several events this month, as the mortgage industry works to jumpstart the securities market in the wake of the financial crisis.

The Mortgage Bankers Association called for the merger of the government-sponsored entities' securities earlier this month at its New Secondary Market conference in New York.

And on Monday the idea also got some play at the American Securitization Forum's annual meeting in Washington, DC.

"It doesn't really make sense for each of them to have different costs of funds, and that's really what we're seeing," Matthew Tomiak, a senior vice president at Bank of America (BAC), said during a panel discussion. "Possibly the most effective way at this point in time would be to create a single security platform."

Freddie Mac mortgage-backed securities trade at a lower price than Fannie Mae's bonds, in part because trading volume is lower and they aren't as liquid.

The Federal Housing Finance Agency has said in its strategic plan that one of its goals is a single security platform, but Tomiak and others at the conference on Tuesday noted that there are ways to bring the two securities more in line in the interim.

"There are steps that could be made to make the securities themselves more homogenous without having to form a new entity," Tomiak said, adding that the process would require "normalizing credit, delivery and most importantly the quality of the guarantee."

Doing so is plausible because the GSEs have a fair amount of leeway under their charters, panel participants said.

"Could the GSEs in fact create a single agency security? I think they can within their charters. There are different ways you can structure it. It has to be carefully done," Amy Williams, a partner at Hunton & Williams, said during the panel.

"There are two different things going on: one is, what do the investors see, and the second thing is, how is it structured behind the scenes?" she added. "Already today in the world of the GSEs…there are structures that go on behind the scenes that are irrelevant to the disclosures and investors, so there may be a way to create a single security from the investor's point of view."

But Williams cautioned that such a plan could be at odds with the increased focus on transparency among regulators.

"We're talking about not telling investors everything about the securities. You start to worry…there's this trend towards greater disclosures," she said.