Fannie and Freddie begin to merge

6-Fannie-Mae-logoJust after a report was released last week criticizing the current role of the government in our nation’s mortgage market, the overseer of Fannie Mae and Freddie Mac announced Monday that a portion of the firms will merge in an effort to begin the transformation away from government conservatorship.

Ed DeMarco, acting head of the Federal Housing Finance Agency which oversees Fannie and Freddie, said in remarks prepared for an economic policy conference Washington, D.C. Monday, that the goal here was to “create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future.”

DeMarco’s first step is to create a joint company that will handle the securitization of home loans. This new model is designed to be flexible and easily adaptable to whatever structure policymakers set forth in the coming years.

Why the merger?

“The merger is like a phoenix,” says Keith Gumbinger, vice president of “They’re building something new out of the ashes of the old.”

In conservatorship, when the two firms no longer existed as private entities, their different business models no longer made sense: two competing business models with different price structures, different software, different programs, etc.

“Developing standard terms, definitions, and industry standard data reporting protocols will decrease costs for originators, servicers and appraisers and reduce repurchase risk,” said DeMarco.

When do the changes take place?

DeMarco said that this joint venture will not begin securitizing loans until next year.

While the news of a merger might appear as though it’s out of the blue, the FHFA released a strategic plan for Fannie and Freddie in Feb. 2012. In that plan, the FHFA identified three “broad goals” to focus on over the next few years:

  1. Build
  2. Contract
  3. Maintain

Expounding upon the “build” goal, the FHFA released a white paper in Oct. 2012 which included the development and framework of this securitization platform.

“To move this project forward in 2013, we are announcing as part of the 2013 Scorecard that a new business entity will be established between Fannie Mae and Freddie Mac,” said DeMarco. “We believe that setting up a new structure that is separate from the two companies is important for building a new secondary mortgage market infrastructure. Our objective, as we stated last year, is for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac.”

DeMarco insists that the FHFA’s long-standing goal has always been to have private capital re-enter the market and play a bigger role.

HSH Associates Financial News Blog

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