The idea of potentially unwinding all or part of the uniform mortgage-backed securities process has resurfaced in an analysis of government-sponsored enterprise ownership changes.
While the coordination between Fannie Mae and Freddie Mac on MBS trading took a long time to establish while they've been in conservatorship, some experts have said UMBS would be at odds with a return to the two companies operating more like private entities again, likening it to competitors Wells and Chase coordinating strategies.
The enterprises' oversight chief, Bill Pulte, rebranded the UMBS platform with a plan to return to efforts to open it up to others, but he has been largely silent on the topic since.
UMBS conclusions
Unwinding the UMBS to prepare for operation more like private companies would not have to be an all-or-nothing transition, the authors of the report wrote. They noted that their opinions did not necessarily reflect those of the New York Fed, which sponsors TMPG and is responsible for a large portfolio of agency mortgage bonds.
"If the perceived differences in credit risk reemerged, it may be necessary for Fannie Mae and Freddie Mac MBS to again trade as separate securities, reversing the single security initiative," they wrote. "However, the design and disclosure harmonization that occurred for UMBS could remain in place, reducing some of the drivers of difference in pricing between Fannie and Freddie securities that existed prior to the introduction of UMBS."
However, it would be difficult to avoid disrupting the MBS market and industry norms related to these bonds given any changes to the single security, which has greatly transformed market dynamics.
Prior to the UMBS harmonizing the trading of their securities, Freddie's bonds had less liquidity and issuance than Fannie, but afterwards the trend reversed, the report noted. Those patterns persist to this day, numbers from Ginnie Mae's separate Global Markets Analysis show.
Not only could a trend like that potentially reverse again if the UMBS were unwound to any degree, industry policies and rules tied to mortgage-backed securities could shift, the authors said.
"Internal risk control and regulatory requirements in banks and other regulated entities may put limits on total exposure to Fannie Mae and Freddie Mac securities if their perceived creditworthiness were to change. Originators may need more capital to manage their business to account for greater perceived credit risk," they wrote.
Paired with the guarantee as priority
The report's authors ultimately concluded that both the single security and the GSE guarantee, which President Trump has pledged to protect on an implicit basis, support the market's creditworthiness and liquidity, and thus are priorities to be mindful of in reform given their ability to disrupt the bond market.
"Given the importance of the agency MBS market for U.S. homeowners and the financial system, it is critical that any potential changes to the GSEs' ownership structure be carefully designed with these factors in mind," they wrote.
Ownership change and stock prospects
GSE ownership change appears to be on the back burner, with attention focused on whether Fannie and Freddie have repurchased enough of their own mortgage securities and built up sufficient capital.
Analyst consensus is that given their recent stock price levels and prospects they are likely to outperform, according to S&P Capital IQ Pro.
Their share prices have fluctuated since they got a recent boost from favorable commentary by billionaire Bill Ackman, who is an investor; but at the time of this writing they were still trading more favorably than they had been before that statement.
Fannie has consistently rated a 2 on a scale on which 1 is a recommendation to buy and 5 is a sell recently. Freddie's rating has been 1.75.
