Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241158 
Year of Publication: 
2021
Series/Report no.: 
Staff Reports No. 965
Publisher: 
Federal Reserve Bank of New York, New York, NY
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 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 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.
Subjects: 
MBS
TBA
Single Security Initiative
UMBS
liquidity
JEL: 
G12
G18
G21
E58
Document Type: 
Working Paper

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