Written by Andrew Ackerman and Ben Eisen for the Wall Street Journal on June 25, 2019.

Investors are increasingly wary of the Trump administration’s impending GSE reform bill, and their anxiety has affected the prices for mortgage-backed securities in the national housing market. When compared to mortgages backed by Ginnie Mae, bond data shows that Fannie and Freddie securities are trading at a growing discount. 

Ginnie Mae mortgage-backed securities with a 3.5% coupon traded as much as a penny on the dollar higher in price than comparable securities issued by Fannie Mae last week; this is the highest recorded differential since last October. At the beginning of June, that gap was around 80% of its current number, and bond data predicts continued price drops. Plain vanilla loans – or fixed rate mortgages – are now trading at a higher borrowing cost.

Fannie and Freddie securities constitute the world’s second largest bond market, with a market share only marginally lower than that of Treasury bonds. The housing market touches 15% of the national economy and shifts in FHFA policy affect more than the prices of mortgage-backed securities.

Investors say the RMBS price differential has widened as newly appointed FHFA Director Mark Calabria prepares to release the mortgage giants from their longstanding federal conservatorship. The demand for Fannie and Freddie securities is bolstered by their federal backing; as the fate of the mortgage giants remains in flux, investor anxieties will continue to grow.

Initially, Calabria expressed support for a congressional effort to establish a federal backstop for Fannie and Freddie securities post-conservatorship. For a decade, Congress has failed to pass meaningful housing finance reform, and their recent efforts predictably stalled. Calabria now looks to release Fannie and Freddie without congressional support, and investors’ risk assessments have spiked accordingly. “A lot of what you’re going to see out of Treasury and a lot of what you’re going to see here is, how do we continue to make administrative actions that aren’t dependent on Congress,” he said in an interview with the Wall Street Journal earlier in June.

Over the last few months, the price spread between company securities translates to about a 0.05% increase in interest rates for Fannie and Freddie backed loans. That is about $50 more per year on a $100,000 mortgage. Though this difference is small, the Trump administration’s housing overhaul is fairly undeveloped. If this spread is representative of a trend in bond markets, the impact when Calabria moves forward with the release could be substantial.

“This is a rare public policy issue where we can actually observe in the market the very real impact of what our members are worried about,” said Michael Bright, chief executive of the Structured Finance Association. “Ending conservatorship without legislation means fewer investors for GSE mortgages and that means higher interest rates for borrowers.”

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