March 25, 2025 | In the this issue of The Institutional Risk Analyst, we feature a guest comment from Michael Pyatski of IVolatility. Now that the U.S. Senate has confirmed Bill Pulte as Director of the Federal Housing Finance Agency (FHFA), industry reports say that Pulte’s top priority will not be removing Fannie Mae and Freddie Mac from government conservatorship. Instead, he’ll focus on rooting out fraud and abuse inside the two companies, CNN reports, and ensure they are running efficiently. But before Pulte spends a lot of time digging through the bowels of the GSEs, there may be an easier way to make the mortgage market more efficient -- by improving the market.
Greater Transparency Will Make the Mortgage Market More Efficient
By Michael Pyatski
In inefficient markets, bonds can trade at incorrect prices for extended periods before adjusting. Market inefficiency is typically driven by illiquidity. For example, in the municipal bond market, less than 0.5% of bonds trade annually, making it unclear just how these bonds should be priced.
The mortgage-backed securities (MBS) market, however, tells a different story. As of February 2025, the average daily trading volume for agency MBS was approximately $370.3 billion. Extrapolated over 252 trading days, this results in an estimated annual trading volume of around $93.3 trillion. This implies that the annual trading volume is roughly 7.8 times the total outstanding MBS volume, highlighting the market’s high liquidity and turnover.
So, why do MBS bond prices remain inefficient despite such liquidity? At his February 27, 2025 Senate nomination hearing, Pulte spoke about affordability in the U.S. housing market — something that was destroyed by the Fed’s low interest rates policies during COVID. But there are other important factors at play in the world of MBS that Pulte and HUD Secretary Scott Turner can address quickly and consistent with conservative principles of free markets.
We believe the core reason for the lack of efficiency in the mortgage market is similar to why U.S. hospitals can charge vastly different prices for the same services — sometimes with discrepancies of up to tenfold. The solution during the first Trump administration was to require all hospitals to publicly disclose all services provided and the prices charged on their websites. We hope this policy will be pursued again in a second Trump administration. The basic issue is transparency.
In the case of MBS, though, it's not just about price transparency but also the transparency of the underlying data backing these bonds as well as the security prices themselves. If market participants could directly access and utilize this data to price bonds, it would significantly improve pricing efficiency in the MBS market. This, in turn, would lower borrowing rates for consumers and provide broader benefits to the U.S. economy.
Who benefits from lack of transparency now? GSEs? Investors in MBS? Overall, no one benefits from a lack of transparency. MBS transactions are conducted with limited information and, therefore, carry a higher risk premium in the secondary markets, which is passed on to the primary market in the form of higher borrowing costs for consumers.
Typically, when two parties transact under conditions of asymmetric information, the party with more information gains an advantage. Acquiring more information is called progress, which is beneficial. Earning profits from this can be even better—but not when it comes at the expense of the public good. This is a clear case of an economic externality, where government intervention is needed to make markets more efficient. Greater transparency in the MBS market leads to more efficient pricing, ultimately reducing borrowing costs for consumers.
A more efficient MBS market benefits everyone by lowering mortgage rates and making homeownership more affordable. The savings to the U.S. economy can be estimated: a 25 basis point reduction in the primary mortgage rate would yield more than $30 billion in annual savings on the $13 trillion U.S. MBS market.
Pulte and Turner Can Change the Status Quo
The GSEs and GNMA release only limited loan- and security-level data to market participants on the loans they guarantee. For some non-agency mortgages, data is available through a few large vendors, but it is limited, difficult to use, and prohibitively expensive. GSEs and GNMA are doing a great job of releasing data on conforming loans, but not all relevant data is being made publicly available or easily accessible. Data on 144A private placement deals is not typically publicly released and is extremely complicated to use when available.
Some pricing data is available (e.g., via FINRA TRACE reporting), but pre-market pricing data is not publicly available as it is most other markets. As a result, most of the MBS market relies on incomplete information, making it less efficient and more costly for consumers and global investors. So while the government and agency MBS markets are very liquid, they are also very inefficient. Consumers pay for this inefficiency. Who benefits? - the party with more information gains an advantage so there is an incentive to keep disclosure limited.
We propose that the FHFA and also HUD adopt the following implementation steps at no cost to taxpayers to improve the efficiency of the mortgage market.
Increase Transparency – The FHFA should publicly release all performance and reference data available on conventional mortgages. GSEs and Ginnie Mae have done an excellent job by releasing the data publicly in recent years, and they can build on this progress
Encourage Broader Participation – The Ginnie Mae, servicers, and trustees should do the same for FHA, VA, USDA, Non-Agency, and 144A deals by making mortgage data accessible.
Promote Public Release of MBS Pre-Market Pricing Data – This data is already available to many but not all market participants. Its broader release would enhance market efficiency without disrupting pricing.
Greater transparency in the MBS market will lead to more efficient loan pricing, ultimately lowering borrowing costs for consumers. A more efficient mortgage backed securities market benefits everyone by lowering mortgage rates and making home ownership more affordable.
“Housing and safety and soundness of the housing market is a bipartisan issue, and I firmly believe that we must work together to address the severe housing challenges that our country faces,” Pulte said. Why not start with these relatively easy steps that the FHFA and HUD can immediately address?
As Director Pulte and Secretary Turner work to improve affordability in the housing finance market, they should use the power of free access to information, data that is currently withheld from the public by the GSEs and HUD, to improve the quality of market execution that consumers receive when they get a government or agency mortgage to buy a home. Consumers will thank them.
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