The Treasury Market Practices Group (TMPG) recently released a consultative note highlighting theoretical implications for the agency mortgage-backed securities (MBS) market from potential changes to the ownership structure of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs).
The TMPG is a New York Fed-sponsored group of market professionals who are committed to supporting the integrity and efficiency of the Treasury, agency debt, and agency MBS markets. The TMPG includes senior business managers and legal and compliance professionals from various institutions, such as securities dealers, banks, buy-side firms, market utilities, and foreign central banks.
The summary note, informed by discussions with market participants, describes the current ownership structure of the GSEs and highlights key considerations when thinking about potential changes to that ownership structure. In this article, we highlight the key points in the summary note, with a focus on the liquidity and functioning of the agency MBS market.
Currently in Government Conservatorship
Fannie Mae and Freddie Mac are two GSEs that were created by Congress to support home ownership and expand the secondary mortgage market by securitizing mortgage loans into MBS. Mortgage securities securitized by the GSEs and Ginnie Mae are referred to as “agency” MBS. The two GSEs guarantee over $6.6 trillion in agency MBS, or nearly half of all outstanding single-family U.S. mortgage debt. In September 2008, after experiencing significant capital losses during the global financial crisis, Fannie Mae and Freddie Mac were placed into government conservatorship.
At the time, conservatorship was intended to be a temporary measure to allow the GSEs to improve their business model. A significant feature of the government conservatorship was the change in the implicit government guarantee for the GSEs. Before conservatorship, investors generally assumed that the government would provide financial support if the GSEs required it, even though no explicit terms on such support were in place. Currently, each GSE’s charter provides a $2.25 billion line of credit from the U.S. Treasury. They also have an additional $254 billion funding commitment from the U.S. Treasury under the Preferred Stock Purchase Agreements.
Considerations on Potential Changes to GSE Ownership Structure
Currently the counterparty credit risk, or the potential exposure due to the issuer, associated with holding agency MBS is viewed by market participants as the same as that of any other U.S. government security. If a change to GSE ownership structure were to include removing (or the perception of removing) the implicit government guarantee, the market evaluation of the risk profile of agency MBS could shift. Key considerations around how such a change could affect agency MBS liquidity and market functioning include: the status of the government guarantee, questions around whether unified mortgage-backed securities would remain, and the potential for an overall shift in public market perception.
Assessing the Government Guarantee: If market participants’ perception of the strength of the government guarantee were to change, some investors could view agency MBS as having a higher credit risk exposure. This matters because currently, Fannie Mae and Freddie Mac securities have a price premium under the guarantee. If the guarantee were to change, investors may need to anticipate interest rate risk (as they do today) as well as counterparty credit risk.
Credit products tend to have wider bid-ask spreads and higher trading costs compared to government securities. If agency MBS were viewed as a credit product, overall liquidity in mortgage markets would likely decrease and consequently increased costs would be more broadly passed on to mortgage borrowers.
The Single Security Initiative: The Single Security Initiative (SSI) was a major development for the GSEs since they came under conservatorship. It was a multi-year effort during which the market transitioned from trading Fannie Mae and Freddie Mac MBS separately to trading them together in one new uniform security, Uniform MBS (UMBS). The SSI was intended to save taxpayers money by eliminating the historical pricing disparity between Fannie Mae and Freddie Mac securities and to improve liquidity in the agency MBS market. These, in turn, reduced trading costs for agency MBS and lowered borrowing costs for homeowners.
If the perceived differences in credit risk as observed before UMBS were to reemerge, Fannie Mae and Freddie Mac securities may need to trade as separate securities, reversing the SSI.
Current guidelines address how to commingle Fannie Mae and Freddie Mac MBS, but not how to unwind UMBS. It would likely take time for investors to develop policies and procedures before any unwind. The downstream effects on settlement systems, such as potential changes to the currently unified system, would also need to be evaluated.
Shifts in Market Perception: Shifts in overall market perception could mean market participants’ internal risk controls and regulatory requirements for banks holding agency MBS may need to be updated. In addition, agency MBS could trade at higher rates, leading to increased borrowing costs and tighter lending standards for homeowners.
Summing Up
The agency MBS market is a deep and liquid securities market that serves vital functions for the U.S. housing market and financial markets broadly. It currently benefits from its creditworthiness due to its government guarantee and improved liquidity from the introduction of UMBS. Given the importance of the agency MBS market for U.S. homeowners and the financial system, it is critical that any potential changes to the GSEs’ ownership structure be carefully designed with these factors in mind to ensure that this market remains robust and resilient.
The TMPG is collecting public comments on this consultative note through April 30, 2026. More information can be found here.
Markets Group colleagues Jeffrey Levine, Grant Kaste, and Michael Rose contributed extensive insights and feedback on the consultative note.
Anne Chen is a capital markets trading and analytics principal in the Markets Group.
Ellen Correia Golay is a capital markets trading advisor in the Markets Group.
Julie Hennighausen is a capital markets trading associate director in the Markets Group.
Agata Zhang is a policy and market analysis principal in the Markets Group.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
