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April 17, 2015  

Costs Soar as Common MBS Effort Founders

Frustrations are mounting for the Federal Housing Finance Agency as it attempts to centralize all agency and non-agency mortgage securitizations within a single program.

Continuing with behind-the-scenes opposition they have expressed toward the effort since its start, Fannie Mae and Freddie Mac recently have dug in their heels. Expenses have been piling up in the meantime, with no end in sight.

The upshot is that the already slow-moving initiative is seen as likely to miss its anticipated launch date of early 2018.

Word had emerged about a year ago that Fannie and Freddie weren’t cooperating with the FHFA, which has been developing its so-called Common Securitization Platform through an entity called Common Securitization Solutions. Indeed, indications at the time were that neither agency had taken any meaningful steps to get the program up and running.

The turf war has continued since then, with Fannie and Freddie most recently signaling to the FHFA that they wouldn’t give up master servicing rights for their loans — apparently a key step in the creation of the shared program.

Staffing also has been an issue. Fannie and Freddie have given the appearance of going along with the effort, and have hired extensively for that purpose. But they now are faced with costly training projects because they often selected people without structured-finance expertise. “It’s a complete mess,” a source close to the initiative said. “Fannie and Freddie don’t want to do it and hired people with insurance backgrounds to work on this, [and] have since had to hire consultants to teach their employees the basics of securitization.”

All told, spending on the program has topped $200 million, the source said. A large chunk of that has consisted of fees paid to some 400 consultants at a minimum rate of $125 per hour. Some big-ticket consultants, including Newbold Advisors and PricewaterhouseCoopers, also are receiving monthly retainers of $6,000.

Adding to the FHFA’s aggravations: The regulator asked Fannie and Freddie in a progress report last May for estimates of their costs, but never received them. The report also criticized Fannie and Freddie for failing to establish a schedule.

A “2015 Scorecard” the FHFA released this January graded the program’s state at 30% out of a possible 100%.

The FHFA began work on Common Securitization Platform in 2012 with the vision of centralizing all issuing, payment and reporting functions across the markets for agency and non-agency mortgage bonds. The program, to be owned by Fannie and Freddie, was billed as offering incentives for more private-sector mortgage financing while aiding the agencies in shedding risk and updating their back-office functions.

It also was seen as a way to maintain liquidity in the mortgage-bond market amid various proposals to dissolve Fannie and Freddie.

Those efforts, including one that would replace the agencies with an entity dubbed Federal Mortgage Insurance Corp., have largely stalled. Fannie and Freddie, meanwhile, have seen their already-dominant shares of the mortgage market grow under FHFA director Mel Watt. That has emboldened them in resisting the common program, which they view as opening the door to more private-label lenders.

“It’s hard to see how it’s in the interest of Fannie and Freddie to promote that kind of structure when Congress still has to decide their future,” another source said. “But they’re spending an awful lot of money on something they don’t want to do, and that has to be a concern.”

Common Securitization Solutions is overseen by a board that includes several Fannie and Freddie executives. Former GMAC Mortgage head David Applegate serves as chief executive.