Defragmenting Markets: Evidence from Agency MBS

53 Pages Posted: 5 May 2021

See all articles by Haoyang Liu

Haoyang Liu

Federal Reserve Bank of New York

Zhaogang Song

Johns Hopkins University - Carey Business School

James I. Vickery

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: May 2021

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.

Keywords: MBS, TBA, Single Security Initiative, UMBS, liquidity

JEL Classification: G12, G18, G21, E58

Suggested Citation

Liu, Haoyang and Song, Zhaogang and Vickery, James Ian, Defragmenting Markets: Evidence from Agency MBS (May 2021). FRB of New York Staff Report No. 965, Available at SSRN: https://ssrn.com/abstract=3838913 or http://dx.doi.org/10.2139/ssrn.3838913

Haoyang Liu (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

James Ian Vickery

Federal Reserve Bank of Philadelphia ( email )

10 Independence Mall
Philadelphia, PA 19106
United States
+12155746549 (Phone)

HOME PAGE: http://www.vickeryjames.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
64
Abstract Views
325
rank
459,804
PlumX Metrics