New scoring system aims to woo investors and spur lending to underserved borrowers
Fannie Mae is looking to attract “socially-minded” investors with a new type of mortgage-backed security (MBS).
The mortgage giant has launched a new initiative to sell agency mortgage-backed securities (MBS) that cater to socially conscious investors, aiming to attract more buyers to the market, Bloomberg reported.
Fannie Mae assigns scores to MBS pools based on affordable rental housing availability, borrower location (high-poverty or rural areas), and other indicators. The goal is to provide investors with more visibility into the underlying mortgages and stimulate lending to underserved borrowers, potentially leading to lower interest rates for these borrowers.
Evolving MBS landscape
Fannie Mae CEO Priscilla Almodovar explained that it costs more to originate these mortgages, referring to the additional costs associated with lending to underserved borrowers.
“This is the way for us to incentivize them,” she said.
Almodovar stressed that change is needed. The agency’s traditional reliance on domestic banks and the Federal Reserve as major MBS buyers is no longer viable. The Fed is no longer actively purchasing MBS, and banks have become less engaged in the market.
Over the past 15 years, Fannie Mae, Freddie Mac, and Ginnie Mae have issued around $4 trillion of MBS – nearly all of which has been absorbed by the Federal Reserve and domestic banks.
“Mortgage rates are going to be dictated by asset managers and no longer the Fed’s portfolio,” said Devang Doshi, a senior vice president at Fannie Mae.
This is why Fannie Mae must take steps to ensure MBS are attractive to investors, Doshi added.
Early stages, potential impact
Fannie Mae rolled out the updated social index in late 2022 and conducted its first auction of “mission-scored” mortgage bonds in March, followed by a second sale earlier this month. Freddie Mac will begin applying the new criteria to its own bonds starting in June.
Read more: Freddie Mac, Fannie Mae revamp social MBS framework to boost affordable housing
While it’s too early to fully assess the program’s effectiveness, Erica Adelberg, MBS strategist for Bloomberg Intelligence, sees the potential.
“It’s still too early to tell how effective the mission index will be in creating demand for underserved borrowers,” Adelberg said. “But there currently aren’t a lot of [MBS] pools that score high on the Mission rankings, so it seems like there’s room for upside.”
Adelberg added that pools with high scores may appeal to investors looking to satisfy social mandates and funds looking for more favorable prepayment behavior.
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