Defragmenting Markets: Evidence from Agency MBS

Haoyang Liu (), Zhaogang Song and James Vickery ()

No 21-25, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: 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 higher rate of return on securitization for Fannie Mae. We then analyze a change in market design – the Single Security Initiative – which consolidated Fannie Mae and Freddie Mac MBS trading into a single market in June 2019. We find that consolidation increased the liquidity and prices of Freddie Mac MBS without measurably reducing liquidity for Fannie Mae; this was in part achieved by aligning characteristics of the underlying MBS pools issued by the two agencies. Prices partially converged prior to the consolidation event, in anticipation of future liquidity. Consolidation increased Freddie Mac’s fee income by enabling it to remove discounts that previously compensated loan sellers for lower liquidity

Keywords: MBS; TBA; Single Security Initiative; UMBS; liquidity (search for similar items in EconPapers)
JEL-codes: E58 G12 G18 G21 (search for similar items in EconPapers)
Pages: 53
Date: 2021-06-24
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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DOI: 10.21799/frbp.wp.2021.25

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