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The Federal Housing Finance Agency is moving forward with the charge but also pledged to ensure it doesn’t undermine the uniform security’s advantages the way trade groups say it could.
Authors: Haoyang Liu, Zhaogang Song, and James Vickery Agency mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac have historically traded in separate forward markets. We study the consequences of this fragmentation, showing that market liquidity endogenously concentrated in Fannie Mae MBS, leading to higher issuance and trading volume, lower transaction costs, higher security prices, and a lower primary market cost of capital for Fannie Mae. We then analyze a change in market design—the Single Security Initiative—which consolidated Fannie Mae and Freddie Mac...