The Federal Housing Finance Agency (FHFA) has unveiled its proposal to create a single, common security that would be issued and guaranteed by government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac.
As such, the agency is requesting feedback from mortgage industry professionals on all aspects of the proposed Single Security structure and in particular, issues regarding the transition from the current system to a Single Security.
To that end, the FHFA released a set of questions that it hopes mortgage professionals can answer in order to arrive at a Single Security framework that meets the needs and concerns of all industry players.
The questions include the following:
- What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?
- What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?
- As discussed above, this is a multiyear initiative with many stakeholders. What operational system, policy (e.g., investment guideline), or other effects on the industry should be considered?
- What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption?
Basically, the proposed structure is an amalgam of the GSEs' existing security structures. As per the FHFA's announcement, it would ‘encompass many of the pooling features of the current Fannie Mae Mortgage-Backed Security (MBS) and most of the disclosure framework of the current Freddie Mac Participation Certificate.’
‘FHFA's goal for the proposed Single Security structure is for legacy Fannie Mae MBS and legacy Freddie Mac PCs (legacy securities) to be fungible with the Single Security for purposes of fulfilling ‘to-be-announced’ (TBA) contracts,’ the FHFA said in a statement. ‘Because the proposed Single Security design would include most of the features of the current Fannie Mae MBS, an exchange option for legacy Fannie Mae MBS to Single Securities may not be necessary. To achieve the goal of maintaining maximum market liquidity, it is important to ensure that the legacy Freddie Mac PC is fully fungible with the Single Security as well. Therefore, if necessary, investors would be offered an option to exchange a legacy PC for a comparable Single Security.’
The FHFA has made it clear that the mortgages that Fannie and Freddie purchase will not be co-mingled in first-level Single Security formation. ‘This is the same purchase and guarantee framework for a Fannie Mae MBS or a Freddie Mac PC that exists today,’ the agency said in its release.
In order to arrive at a Single Security, all mortgage bonds issued would have the same common features – all of which exist in the current market – including a ‘payment delay of 55 days; pooling prefixes; mortgage coupon pooling requirements; minimum pool submission amounts; general loan requirements such as first-lien position, good title, and non-delinquent status; seasoning requirements; and loan repurchase, substitution and removal guidelines.’
In developing the new structure, the FHFA has acknowledged that the single common security will likely be more like the current Fannie Mae structure than it is like the Freddie Mac structure, and, ‘therefore, legacy Fannie Mae MBS would likely be fungible with the Single Security.’
But to allay investor concerns that the Freddie Mac securities won't be as attractive compared to the Fannie Mae securities, the FHFA said it is ‘committed to achieving comparable fungibility for legacy Freddie Mac PCs.’
‘To further the goal of achieving maximum market liquidity, legacy Freddie Mac PC investors, if necessary, would be offered the option to exchange a Freddie Mac PC for a comparable Single Security backed by the same mortgage loans,’ the FHFA said in its proposal. ‘The option would be available for the life of the legacy PC starting from the introduction of the Single Security.’
Feedback on the proposal is due by Oct. 13.
Mel Watt, director of the FHFA, announced the agency's intention to get the GSEs onto a Single Security when he unveiled the agency's revamped strategic plan for 2014 in May.
As part of that plan, the FHFA has directed the GSEs to accelerate their project to build a common securitization platform, which will likely take years to complete. In October, the FHFA announced that the GSEs had formed a joint venture to build and operate the new platform. In addition, it established a new technology company, Common Securitization Solutions, to develop and operate the new platform.
However, Watt said in his speech in May that for practical reasons, the new platform would initially be limited to supporting only the GSEs, instead of a wider constellation of securitizers. The initial lofty goal of building a platform that would be truly universal and rolled out all at once was simply too risky, he explained, due to the potential disruptions to the market that could take place during the transition. What's more, with housing finance reform still unresolved, there could be challenges in developing a platform that would properly meet the needs of the future market, he said.
‘Moving forward, we will focus our efforts on creating a common securitization platform that can undertake Fannie Mae and Freddie Mac's current securitization operations,’ Watt said in his speech. ‘A successful outcome will be a seamless transition from the current in-house systems that issue new securities at each enterprise to a future joint venture owned by Fannie Mae and Freddie Mac that operates one system with updated technology.’
Moving the enterprises to a single, common security ‘will improve liquidity in the housing finance markets,’ Watt said. ‘It would also reduce costs to the enterprises, particularly Freddie Mac, since Freddie's securities have historically traded at a disadvantage compared to Fannie Mae.’
In response to the proposal, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), said, ‘For more than two years, we have been talking to the GSEs, policymakers and a broad array of stakeholders about the widespread benefits of a fungible, pooled, TBA-eligible GSE securities market. [This] announcement takes what many told us was an unworkable fantasy and brings it closer to reality.
‘The move to a single security will enable the two GSEs to compete on a more level playing field, and this competition will be beneficial to both homebuyers and lenders,’ Stevens said. ‘In addition, it will be an important piece to help transition the market to any new future structure by providing a more flexible and efficient way of trading securities. Director Watt and his team deserve a lot of credit for moving forward on this critical initiative, and we look forward to working with FHFA and the GSEs on implementation.’Â
To view the full proposal, click here.