GSEs Set to Start Issuing Single Common Security

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The infrastructure is in place, testing is complete and government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are set to start issuing a single common security on June 3.

Freddie Mac reports that it is set to issue its first 55-day, TBA-eligible Uniform Mortgage Backed Security (UMBS) on that date, while Fannie Mae specifies that it will begin accepting forward UMBS trades with a trade date on or after March 12 and settlement dates on or after June 3.

Freddie Mac will no longer issue new Gold PCs with a 45-day payment delay after May 31, the company says in a release.

Beginning on May 7, Freddie Mac plans to offer holders of 45-day, TBA-eligible and non-TBA-eligible PCs and Giants the option to exchange their eligible 45-day securities for 55-day Freddie Mac mirror securities.

Freddie Mac’s retained portfolio will book the first exchange transaction in late March.

The new common security has been in the works for several years – it was originally set to go live in 2018 but its development has faced some delays.

Last fall, the Federal Housing Finance Agency (FHFA) announced that it had completed testing of “Release 2” or the second phase of the transition to a shared platform.

Two weeks ago, the agency issued a final rule on the new UMBS that requires there GSEs to align their programs, policies and practices that affect the cash flows of “To-Be-Announced” (TBA)-eligible Mortgage-Backed Securities (MBS).

In addition, the final rule makes explicit the potential consequences to the enterprises for misalignment.

The final rule also instructs the enterprises to lower the maximum mortgage note rate eligible for inclusion in an MBS.

The GSEs will use the common security for issuance and monthly processing of single-class UMBS backed by fixed rate loans, single-class resecuritizations of UMBS (to be known as Supers), multiclass securities such as REMICs, and various functions that will differ by GSE for securities that are backed by adjustable-rate loans.

In addition system-to-system, bilateral end-to-end, and data conversion testing for Release 2, testing with vendors that use and distribute securities disclosure data has been completed.

Tri-party end-to-end testing, with both Fannie Mae and Freddie Mac conducting daily processing and testing in a single CSP environment, is also complete.

In September, Freddie Mac and Common Security Solutions – the technology firm established to build the infrastructure to support the new security – migrated Freddie Mac’s production processing for single-class MBS (that is, PCs and Giants) from Release 1 to the relevant Release 2 code, confirming that the relevant Release 2 modules are production ready for single-class securities.

In addition to the recent testing, the FHFA has provided additional regulatory clarity on tax and accounting issues from the Securities and Exchange Commission and the Internal Revenue Service.

The agency has also taken steps to maintain the alignment of prepayment speeds across corresponding cohorts of the GSEs’ TBA-eligible securities, including FHFA’s proposed rule to require the GSEs to align certain programs, policies, and practices that could affect cash flows to investors from UMBS, and quarterly Prepayment Monitoring Reports.

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