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Term: Agency Swap Program

15 May 2015

DEFINITION of ‘Agency Swap Program’
A form of securitisation whereby single-family residential mortgages are swapped for mortgage-backed securities issued by government agencies such as Fannie Mae and Freddie Mac. A well-known agency swap program was the one used by the Resolution Trust Corporation (RTC) in 1990 as one of the tools to resolve the savings and loan (S & L) crisis of the 1980s.

The RTC’s agency swap program was initiated after its board decide to use securitisation – the process by which similar assets with predictable cash flows are packaged into securities that pay interest – to dispose of financial assets. These assets were mainly home loans acquired from numerous S & L institutions that were placed under conservatorship or receivership following the 1980s crisis, which had resulted in the biggest collapse of U.S. financial institutions since the 1930s.

The RTC agency swap program was restricted to single-family performing residential loans that conformed to the stringent underwriting guidelines or standards demanded by Fannie Mae and Freddie Mac. Under the program, the RTC either sold for cash or swapped for Fannie Mae/ Freddie Mac mortgage-backed securities, $6.1 billion of conforming residential mortgages.

The Fannie Mae / Freddie Mac mortgage-backed securities received by the RTC in exchange for the loans were then sold by its trading desk to investors. These mortgage-backed securities were popular with investors because they had a guarantee of payment of principal and interest from Fannie Mae and Freddie Mac, which were government-sponsored entities.

The agency swap program was only a small component of the RTC’s liquidation of more than $400 billion in assets, since the single-family loans it held did not conform to Fannie Mae / Freddie Mac standards. Overall, the securitisation initiatives undertaken by the RTC proved successful in resolving the S & L crisis, as by year-end of 1995, only $8 billion or about 2% of the original portfolio of $402.6 billion in assets had not been liquidated.

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