Due to the spread between Fannie Mae and Freddie Mac mortgage-backed securities, Freddie paid lenders an estimated $650 million in 2013 to match what Fannie pays its lenders, according to new estimates by an independent economist.
Freddie participate certificates have traded at a disadvantage to Fannie MBS for many years. The $650 million subsidy (which Freddie calls "market adjusted pricing" or MAP) ensures lenders will receive nearly the same price as Fannie pays for loans.
The MAP payment also benefits investors because Freddie’s participation certificates trade a discount to Fannie mortgage-backed securities, according to economist Jay Brinkmann, former chief economist with the Mortgage Bankers Association.
"As long as the performance of the securities is essentially the same, investors get a better yield on the Freddie’s because they pay a lower price for the exact same performance and same credit guarantee from the government," Brinkman said.
Now based in New Orleans, Brinkmann estimates that Freddie has made $3.2 billion in MAP payments (2009-2014) since the GSEs were placed in conservatorship. He estimates the MAP payments in 2014 will total $375 million by yearend and it could be higher if refinancings pick up in the final quarter.
The government-sponsored enterprise regulator is trying to make Freddie participation certificates more competitive with Fannie MBS by creating a single security so the market adjusted pricing payments are no longer necessary.
Fannie and Freddie would issue securities with identical payment dates and other features, according to the FHFA’s proposal. This single security would be issued via a new common securitization platform that is expected to take several years to build.
"The most interesting part of this proposal is the ability to place Freddie Mac securities into Fannie Mae resecuritizations" and Fannie securities into Freddie resecuritizations, according to Laurie Goodman the director of the Urban Institute's Housing Finance Policy Center.
"This structural option makes it very likely that the securities backed by the entities will trade equivalently," she said in a Sept. 5 report entitled "The $400 million case for a single GSE security."
The Mortgage Bankers Association supports the FHFA’s move but the trade group would like the agency to accelerate the timetable for issuing the single security and drop the linkage with the common securitization platform, which could take several years to complete.
"FHFA should act quickly to have the GSEs make the necessary changes to their processes within a relatively short timeframe and uncouple the single security process from the worthy, but necessarily complicated, development of the common securitization platform," said David Stevens, the president and chief executive of MBA.
Goodman also expressed concerns that "FHFA may be contemplating a slower pace in the project than it warrants." She noted that Freddie is forced to subsidize lenders, "the cost of which is ultimately borne by U.S. taxpayers."
