dhollier@imfpubs.com

The Federal Housing Finance Agency surprised the industry on Monday, announcing that Fannie Mae and Freddie Mac would support liquidity in the mortgage market by engaging in dollar rollover transactions.

A dollar rollover is a kind of short-term loan akin to a repo (repurchase agreement). In this case, the enterprise would agree to buy agency MBS from a borrower, and sell them back after an agreed upon period. The difference in prices between those two transactions would amount to the interest on the loan, which the FHFA stipulated should be market rates.

The announcement raised an important question: Why would companies as famously short of capital as the GSEs be doing dollar rollovers? The FHFA clarified the issue on Wednesday, saying that the rollovers were only intended to be a short-term expedient to help mortgage REITs and other investors facing a liquidity crunch.

The main concern was that investors facing margin calls might not have sufficient liquidity while waiting to receive principal and interest payments on their bonds. Those principal and interest payments go out on the 25th of each month.

“The move to increase liquidity was done for just three days, Monday, Tuesday and Wednesday,” an FHFA spokesperson said. “The dollar rolls were really just to float people until their principal and interest payments came in on the bonds, and then the loans would be repaid. These were really just weird and short-term liquidity issues.” For more on the story, see the new editions of Inside MBS & ABS and Inside The GSEs later in the week.