The U.S. housing finance system is never static. As the details of possible future systems are debated on Capitol Hill and the Internet, the current system continues to change while financing billions of dollars in single- and multifamily mortgages every month. Freddie Mac's approach to mortgage finance is changing in ways intended to maintain liquidity for borrowers while posing less risk to taxpayers.
A second, quieter revolutionary change – one that may also be pointing toward the future of housing finance – is the advance of Freddie Mac guaranteed securities backed by pools of mortgages delivered by multiple lenders. (Mortgage securities are typically backed by loans from a single lender.)
One well-reported trend involves risk sharing transactions, like Freddie Mac's K-Deals, STACR® debt notes, and credit risk insurance, which are bringing billions of dollars of new private capital back into the mortgage market.
Since 2012, the percentage of new TBA-deliverable 30- and 15-year Freddie Mac Participation Certificates backed by Multi-lender pools grew from about 25 percent in January 2012 to 80 percent this past April. The mortgage pools backing these securities include deliveries from national, regional, and community lenders. (Remember the U.S. motto: E Pluribus Unum – [From Many, One]? It's the same idea only with securitized mortgage pools.)
Lenders choosing this option exchange 15-year and 30-year conventional mortgages for a pro-rata share in a Freddie Mac Multi-lender PC deliverable to the To Be Announced (TBA) market. Multi-lender PCs are also available for 20-year and super-conforming mortgages.
The recent growth in Multi-lender pools is a significant trend for three reasons.
First, drawing on loans from multiple lenders can produce more stable and predictable prepayments in mortgage pools. Combining loans from diverse lenders into a large, liquid pool mitigates the risk of outlier prepayments from any particular lender affecting investor return. Investors can be more confident that their TBA deliveries will exhibit market average prepayment speeds.
Second, the existence of Multi-lender PCs gives more lenders, especially smaller lenders serving rural markets, easier access to the TBA market for Freddie Mac and other agency securities. Second in size only to the market for U.S. Treasuries, the TBA market currently plays a key role in making mortgage credit available at the best market rates for families looking to buy a home or refinance a single-family loan.
Current industry rules require lenders to create a minimum single-lender pool of $1 million to take advantage of the TBA market. By contrast, Freddie Mac’s Multi-lender option allows lenders to participate with a minimum commitment of only $1,000.
Finally, the concept behind Multi-lender PCs echoes the thinking behind several ideas for reforming housing finance now being discussed. This includes the common securitization platform the Federal Housing Finance Agency is building with Freddie Mac and Fannie Mae. Meanwhile, as the future is debated, we're working with the industry to deliver a stronger security today.
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