Common Securitization Platform is Nearly Complete but Why is it Needed?
Recently, Freddie Mac Senior Vice President for Securitization Mark Hanson happily declared that the Common Securitization Platform will be operational before the end of the year. The CSP is billed as a way to modernize and consolidate Fannie Mae and Freddie Mac’s back-office administrative infrastructure for securitizing purchased mortgages. However, no one should overlook the fact that the CSP is also part of a process to undermine the GSEs.
“If all goes as planned, Freddie Mac will be the first company to issue fixed-rate mortgage-backed securities through the Common Securitization Platform (CSP). We also plan to move all existing fixed-rate Freddie Mac Participation Certificates (PCs) to the CSP, which will support their administration as well as new issuances,” wrote Hanson in an update on Freddie’s website. This would be a milestone in the creation of one kind of security guaranteed either by Freddie Mac or Fannie Mae for trade in the To Be Announced (TBA) market.
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The idea for the CSP emerged in 2012 when the Federal Housing Finance Agency concluded that there was no existing private sector infrastructure capable of securitizing the $100 billion per month in new mortgage originations. Presumably, with a new and improved securitization operation within the GSEs, it would be more feasible to end to the conservatorship of Fannie and Freddie and move forward on comprehensive housing finance reform. Of course, the conservatorship endures and needed policy reforms have gone nowhere.
So is the CSP a solution in search of problem? Fannie and Freddie’s securitization operations survived the 2008 financial crisis. It was the securitization operations of private-sector players that went into dormancy when the private label security market collapsed, as investor trust in these products evaporated. It is not exactly clear why it is so crucial to revamp Fannie and Freddie’s infrastructure and obscure the distinctions between the mortgage-backed securities the GSEs create and sell to investors.
More than likely, the CSP is just one component in a process of dismantling Fannie and Freddie and replacing them with a yet unknown and unproven structure. The CSP happens to coincide with the adoption of risk sharing strategies FHFA has required Fannie and Freddie to adopt in 2012. It is far from clear that risk sharing will actually distribute risk, but it is clear that it will create more exposure for the taxpayer by eroding Fannie and Freddie’s profitability.
Administration officials have long been upfront in wanting to wind down Fannie and Freddie, which they claim is necessary to create a larger role for private capital. Risk sharing combined with the CSP will certainly help large private sector players cherry pick Fannie and Freddie’s core business. As FHFA’s update on the CSP issued last September noted, “The 2014 Conservatorship Strategic Plan also made clear that the CSP would support the issuance by both Enterprises of the Single Security and reaffirmed that the CSP would be developed so that it can be adapted for use by additional market participants in the future.” Not surprisingly, the Mortgage Bankers Association and Structured Financial Industry Group have also been transparent in declaring that the CSP should be designed to enable use by “other participants.”
The problem with all of this, other than new legal issues that will undoubtedly arise from the government giving away the GSE’s business to the big banks, is that nobody has credibly demonstrated that there is enough private capital to fulfill Fannie and Freddie’s mission. The only plausible outcomes to all of this are fewer mortgages and reduced access to homeownership for most Americans.
It was useful for Freddie to give the public an official “heads up” that the CSP is well on the way to becoming a reality in the coming months. Perhaps this is the time for someone on Capitol Hill to ask more questions about the implications of this development for aspiring homebuyers, capital markets and taxpayers.