.jpg)
In a comment letter filed today with the Federal Housing Finance Agency, SIFMA expresses its views that the near-term goal for Fannie Mae and Freddie Mac should be to align their operations as much as possible. Aligning the operations of the GSEs will set the stage for longer-term future of the GSEs and ease the transition to any future state.
“The alignment of the operations of the GSEs will set the stage for the future of both the Enterprises and for mortgage finance more broadly,” said Richard Dorfman, managing director and head of the SIFMA Securitization Group. “SIFMA is focused on the preservation and maximization of the liquidity of the TBA markets, and the maximization of the benefit of forward sales of MBS that they provide to consumers. These include liquidity, ability to lock rates, national mortgage markets, broad availability of fixed-rate products, and the attraction of massive amounts of capital to the U.S. mortgage markets.”
SIFMA notes that market performance indicates a crucial gap in the actual and perceived performance and liquidity of the MBS issued by the GSEs. This liquidity differential impacts the overall cost and efficiency of the GSE securitization process, and their ability to fund mortgage lending optimally. Alignment will lay the groundwork for efforts to mitigate this performance gap, and SIFMA believes the GSEs have the ability to rectify many of the causes of this gap. Addressing this will require at times FHFA to view the GSEs together as opposed to separate operational silos.
Critically, both the steps outlined below and the broader goals of the Strategic Plan will require careful planning, the engagement of the industry, frequent communication, and a focus on the Enterprises’ core activities. Involvement of industry in every stage of the planning and development process will be critical to the success of the strategic plan.
“This plan will require collaboration between the regulators, the GSEs and the industry,” said Chris Killian, managing director in the SIFMA Securitization Group. “The industry
cannot be presented a plan which it did not help create.”
SIFMA also expresses its belief that opportunities are available now to begin to address the performance differential between the Enterprises. Focus should be on improving the existing “cheapest-to-deliver” securities in each market. This can be done independently of the strategic plan, and should begin immediately, as returns will accrue immediately.
In its letter, SIFMA specifically suggests initial focus on the alignment of the following areas:
• Align and Modernize the Infrastructure - Current Enterprise systems are aged and difficult for market participants to use. Systems must be upgraded and modernized. Market confidence in operational integrity through reliable and accessible systems is no less important to market participants than security structures and the Enterprises’ financial stability. The Enterprises should complete modernization with similar, preferably identical, interfaces to the lender and investor communities.
• Align the Operations of the GSEs from Underwriting to Servicing - The Enterprises should align their operations from delivery through pooling and disclosure. This includes underwriting systems (i.e. DU/LP), disclosure, pooling practices, servicing practices, pricing practices, third-party origination policies, loan level and security data disclosures, guarantee fee structures, etc. Certain initiatives are already underway and are to be commended, such as the servicing alignment initiative and improvements to
loan level disclosure. We believe they should be continued and further enhanced – for example, greater uniform historical loan level disclosure for both Enterprises.
• Align the Implementation of New Initiatives and New Programs - The Enterprises should follow common deadlines, work plans, and final implementation for new programs and initiatives. The market has previously borne the uncertainty of differing implementations of various new programs and initiatives, with negative consequences for MBS investors and therefore the consumers served by the Enterprises. The two most recent examples are the implementations of HARP and the large-scale buyouts of delinquent loans in 2010. Going forward, the Enterprises should implement new programs and initiatives in an identical fashion, so as to render their MBS more homogeneous.
• Align the Structure of the Securities - The current Fannie Mae and Freddie Mac securities have one major difference – when security holders are paid. Freddie’s PCs pay on the 15th of the month following the collection of payments from borrowers, while Fannie Mae’s MBS pay on the 25th. This timing difference has implications for the valuation of the securities. To improve homogeneity, these structures should be aligned.
• Address the Credit Quality of the Enterprises - The agreements with the Department of the Treasury will reset to limited amounts at the end of 2012. This, at some point, could lead to MBS investors to view the creditworthiness of each GSE differently. This would reduce homogeneity and overall liquidity. This could be resolved with
cross collateralization or other means of sharing the guarantees and PSPA support. While we do not have a concrete recommendation at this time we believe it is an area that merits careful consideration and exploration by FHFA, starting now.
• Address the Existing Float of TBA Eligible Securities in the Transition to any New State - Utmost care must be taken that changes to the operations of the GSEs and/or the structure of their securities do not interrupt their ability to provide funding. To the extent that the structure of the securities of the GSEs changes, consideration must be given to how to bridge the deliverability of the existing securities into the TBA market for the new securities. For example a change in payment delay will have either positive or negative implications on the value of a security depending on the direction of the change. For a TBA market in a given issuer’s securities to function, the payment
delay for all securities traded in that market should be the same as recommended above. What follows is that changes to the delay would require that an exchange program for existing securities be implemented so that existing securities would be fungible with the new securities. We discuss here a specific instance of change to one security feature, payment delay, but to the extent that other significant changes are made the principle is more broadly applicable. FHFA should begin to consider how securities exchange programs could be optimally structured.
