WASHINGTON (10/15/14)--The proposed single security from the Federal Housing Finance Agency (FHFA) could help make the housing finance system more efficient, according to the Credit Union National Association in a letter sent to the agency Monday.
CUNA's optimism is tempered by a need from the FHFA to provide more insights on the transition from the current mortgage-backed securities to the proposed one.
The FHFA proposed the single security in August, building on a stated goal in this year's strategic plan to develop a single mortgage-backed security (MBS). The goal is to have legacy Fannie Mae MBS and Freddie Mac participation certificates to be mutually interchangeable with the single security. Investors can exchange a legacy certificate for a comparable single security.
CUNA called the FHFA's objective "commendable" and said it might provide the U.S. Congress with additional support for broader housing finance reform. Removing the trade differential between Fannie and Freddie securities could also eliminate the need for market-adjusted pricing payments.
"The system described in FHFA's white paper is especially helpful in that it takes advantage of existing market structures and disclosures for the new security, while allowing both companies to maintain and control their individual credit policies and the risk profile of the loans they securitize," reads the letter, signed by CUNA Deputy General Counsel Mary Dunn. "This allows both companies to continue to compete on price and service, to the benefit of lenders and borrowers alike."
CUNA did raise concerns about the impact the transition to a single security on investments in agency mortgage-backed securities that some credit unions currently hold.
"Although the FHFA white paper suggests an exchange may only be necessary for existing holders of the $1.5 trillion in outstanding Freddie Mac securities, the creation of a new security creates the possibility of 'orphans' being made of any securities that are not exchanged," the letter reads.
"We believe the possibility may exist for a 'run on the bank' scenario, where any holders of Freddie securities who do not exchange their securities will immediately see the value of those securities drop due to liquidity in market conditions."
Use the resource links below to access the full letter, and the original proposal from the FHFA.