The Federal Housing Finance Agency (FHFA) today reiterated its stance on a new fee on some government-backed enterprise securities.
The agency made no promise to delay the fee. Still, some stakeholders unhappy with the fee see an opportunity.
In a statement, FHFA Director Sandra Thompson said her agency was “committed to the continued strength and resilience” of the process for issuing single securities, “given the significant improvement in liquidity and stability” it has given the market. The new fee for securitizing collateral of the other enterprise, the agency said, is meant to help meet the capital requirements in the FHFA’s 2020 capital rule.
Thompson also said FHFA would continue to monitor the markets for uniform mortgage-backed securities and agency-backed securities to make sure they “function as intended.” The FHFA said it would also “continue regular engagement with stakeholders.”
For some stakeholders opposed to the fee, the outreach showed the FHFA is willing to listen, rather than ignore criticism at all costs.
“It is a positive first step, although there is a lot of work needed to clearly map how the activity will be destructive to UMBS,” said Michael Bright, CEO of the Structured Finance Association. “I hope it means we have an opportunity to explain how this fee destroys the fungibility of assets in a futures contract.”
Since the announcement, numerous stakeholders have been vociferous about their unhappiness with the fee, which becomes effective July 1.
The Securities Industry and Financial Markets Association, a trade association that represents broker-dealers, investment banks and asset managers, condemned the new fee in a letter it sent the FHFA on Wednesday.
Members of the trade group said that both GSEs are already charging the fee on commingled securities, a spokesperson said.
Freddie Mac and Fannie Mae did not immediately respond to requests to comment.
The fee “will effectively eliminate the ability of market participants to create [the commingled securities], as it will be non-economic in nearly any conceivable scenario,” wrote Christopher Killian, SIFMA managing director of securitization and credit. “This means UMBS are no longer completely fungible, and breaks a core underpinning of the market’s acceptance of UMBS.”
The Urban Institute today issued a report decrying the fee, authored by its researchers Laurie Goodman, co-founder of the Housing Finance Policy Institute, Jim Parrott, a former Obama administration senior advisor, and Bob Ryan, a former senior advisor at the FHFA.
The researchers wrote that under the prior system, since investors preferred Fannie Mae securities, Freddie Mac had to compensate lenders for the value difference to the tune of about $400 million each year. That reduced the profits sent to taxpayers and, they wrote, and made it more difficult to enact GSE reform, because it gave Fannie Mae a market advantage.
The UMBS “saved taxpayers hundreds of millions of dollars a year and helped pave the way for long-term reform,” the researchers wrote. But they argued the new fee would undo those gains.
“By eliminating the fungibility of the GSEs’ commingled securities, investors may begin to pay more for Fannie Mae’s security, again forcing Freddie Mac to pay lenders a premium to make up for the weaker investor demand for their security.”
Bright, of the SFA, said that the new fee may already have damaged the trust of investors. That could have long-term ramifications for the securities that underpin the functioning of the mortgage market, he said.
“You don’t want to be in a position where investors feel lied to,” said Bright. “Because once they’ve been burnt, they have to price for the possibility of being burnt again.”
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