On Monday, the Federal Housing Finance Agency enacted new rules to standardize how mortgage giants Fannie Mae and Freddie Mac operate. And those changes could benefit homebuyers.
Fannie Mae and Freddie Mac guarantee mortgage loans through the bond market, by consolidating and issuing mortgage-backed securities for investors. However, as Bloomberg reports, investors approach the two mortgage servicers very differently.
"Since mid-2011, Fannie Mae has accounted for well over 80 percent of the trading volume in 15- and 30-year mortgage pools, according to data compiled by Oppenheimer & Co.," the article states. "The relative lack of liquidity in Freddie Mac bonds has meant that they have traditionally traded at a discount to comparable Fannie Mae securities, and Freddie Mac has long paid a subsidy to mortgage originators to push for market share."
The new rules would create more parity between how the two agencies give payouts to investors, requiring that Freddie Mac join Fannie Mae in making payouts in 55 days rather than 45 days. Consequently, the mortgage pools for both agencies will be lumped together as uniform mortgage-backed securities. Theoretically, this will enable more investments to be traded every day and lower the returns on the bond, potentially lowering interest rates for homebuyers.
Consolidating both into one securities pool would also compensate for differences in how investors approach each servicer's anticipated mortgage prepayments, as securities are valued differently based on the extent to which prepayment is expected.
Some critics are concerned that this change will actually increase mortgage rates, however, as prepayment speeds may still affect how investors treat mortgages. The single pool would not prevent investors from being able to pick which servicer's mortgages to back, potentially causing divergence between Fannie Mae, Freddie Mac, and the general UMBS pool and reducing liquidity overall. Less attractive loans could also be packaged together and make prices lower overall for UMBS, resulting in higher mortgage interest rates.
This article originally published at https://dc.urbanturf.com/articles/blog/could-new-rules-for-fannie-mae-and-freddie-mac-lower-mortgage-rates/15477.
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