Testing of New Common Security for GSEs Now Underway

The Federal Housing Finance Agency (FHFA) reports that it is making progress with its plan to develop a single common security for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and that testing for “Release 2,” or the second phase of the transition, is now underway.

The agency says the GSEs, along with Common Security Solutions (CSS) – the company set-up to develop the underlying technology for the new security – have now completed system-to-system, bilateral end-to-end, and data conversion testing for Release 2, which essentially involves migrating both GSEs onto a shared platform.

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, the FHFA says in its most recent update.

Testing with vendors that use and distribute securities disclosure data is also underway.

In April, the FHFA announced that the GSEs would start issuing the new common security – dubbed the Uniform Mortgage-Backed Security (UMBS) – on June 3, 2019.

In September, Freddie Mac and CSS 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.

The GSEs and CSS are now carrying out data conversion activities and are on track to begin parallel processing this month.

With deployment of Release 2 in June 2019, Fannie Mae and Freddie Mac will both 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, the FHFA says.

The new common security was originally set to go live in 2018, but has faced some set-backs.

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

The agency additionally reports that it has 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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