The Federal Housing Finance Agency (FHFA) has released a progress report on the common securitization infrastructure (CSI) being constructed as a replacement for the existing processes used by the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae. The updates are discussed as they relate to the common securitization platform (CSP) which is largely a technology project and the contractual and disclosure framework (CDF) being developed to enhance transparency and investor protections in residential mortgage-backed securities (RMBS).
The proposed new infrastructure was set forth in a white paper issued in October 2012 by FHFA and public comment was invited. A link to that paper is available here. http://www.fhfa.gov/Default.aspx?Page=408
FHFA said it has received public comment on the paper from a broad cross-section of industry participants and other stakeholders and the proposed technology upgrade aspects of the CSP and the specific functions were generally supported. Many comments related to the scope of functionality with the most significant responses seen in five areas. FHFA and the GSEs have been developing a design, scope, and functional requirements for the CSP and have developed a prototype which will incorporate the following responses.
- Ownership/governance. The current plan is to initially structure the CSP as co-owned by the GSEs while the resolution of the conservatorships is decided. The venture will have a CEO and Chairman of the Board who are independent from the GSEs and located separately from them and will be overseen by FHFA. The design is deliberately flexible so that the long-term ownership structure may be adjusted as housing finance reform progresses and FHFA plans to put a formal structure to allow for ongoing industry input in place.
- Build. The GSEs and FHFA are using industry-standard data definitions, protocols, and technology wherever possible; for example by leveraging MISMO initiatives and the Uniform Mortgage Data Program. Existing industry software will be utilized to the extent feasible.
- Access. Several respondents either requested clarity on or specifically recommended that certain market participants have access to the CSP. Some of these participants (servicers and the GSEs) will have immediate access; others such as lenders, mortgage insurers, and security issuers will have access as the CSP evolves over time and the long term goal remains broad, open access.
- Disclosures: Respondents supported standardized, loan-level disclosures and several asked for borrower or property-level information. The CSP functionality does include both initial and on-going loan-level disclosures; updated borrower or property-level information is not in the scope of the initial phase but the design will be flexible enough to allow their incorporation in a future release.
- Functionality. In response to several specific functions proposed by respondents FHFA has taken the following actions:
a. "Life-of-loan" Database or Data Warehouse. FHFA and the GSEs agree that the ability of the CSP to track activity over the life of the loan would be extremely valuable and this function will be included.
b. Loan Acquisition Data. FHFA and the GSEs concur with several respondents that having the CSP undertake uniform validation of loan acquisition data is an important benefit and are assessing how and when to incorporate it into the CSP.
c. Collateral Management Activities and Custodial Functions. The ability of the CSP to perform several collateral management and custodial functions (tracking, verifying and reporting collateral values; document custody, assignment, etc.) would be beneficial. The initial phase of the CSP will include the data necessary for collateral management and the design will be flexible enough to incorporate the function in the future. Custodial functionality will not be included initially although the CSP will track the custodian for each loan.
The current scope for the CSP is comprised of the following modules and infrastructure components:
- Data Validation
- Security Issuance
- Master Servicing
- Bond Administration
- Operational data store
- Industry standard data interfaces
- Life of loan data warehouse
FHFA has directed the GSEs to move forward on the development of the CSP. The next steps are to:
- Establish initial ownership and governance structure, assign dedicated resources and locate a physical site for the CSP Team.
- Develop the design, score and functions requirements for the modules and the initial business operational process model.
- Develop a multi-year plan
- Develop and begin testing the CSP
- Support FHFA progress reports to the public and update documents based on feedback.
Feedback on the CDF indicated that GSE alignment activities were generally viewed as an opportunity to create valuable efficiencies for the market and there was favorable response to efforts already underway to do so.
The following are specific areas that FHFA plans to explore during 2013 as potential for GSE alignment.
- FHFA will review Enterprise practices and determine the feasibility of aligning their borrower refinance solicitation guidelines including those for borrowers who are current on their mortgages, those beginning to show an increased potential for default and others who may be at risk of default. This may allow investors to better gauge the timing of cash flows and prepared risk of securities. Borrowers, in turn, will benefit from more effective, deliberate, and structured contact from servicers.
- FHFA will explore the development of a common GSE strategy for mortgage repurchase and substitution including conditions under which they are allowed, who is responsible, and the timing of collection proceeds related to repurchases.
- FHFA will continue to evaluate the representation and warrantee needs of investors that assume credit risk from transactions in accordance with FHFA scorecard goals for 2013.
- FHFA will continue to review opportunities to create more standard parameters for creating loan pools and will also explore the feasibility of alignment of document custody policies, securities trust documents and servicer performance monitoring.
Regarding non or partially guaranteed RMBS transactions, industry feedback suggested that any new credit structures will have some of their own unique contractual needs and differences. FHFA and the GSEs will evaluate opportunities to develop standards for credit risk transfer activities that address some of the issues raised including;
- Broader market regulatory requirements and uncertainties
- Weaknesses in the Representation and Warranty Framework used in the private label MBS market.
- The need for more robust and timely due diligence.
- Potential conflicts of interest, particularly between senior and subordinate bond holders.
- Fuller disclosures including ongoing servicing disclosures and any expansion of data disclosures at a pool level that could unintentionally create market bifurcation in the formation of pools.
- Changes in GSE guides, especially the servicing guides that could put investors at risk.
FHFA's plan is for the GSEs to undertake the following CDF related steps in 2013.
- Continue the development of the CDF to meet the requirements for investors in mortgage securities and credit risk:
- Identify and develop standards in data disclosure and Seller/Servicer contracts.
- Develop and execute work plans for alignment activities between the Enterprises with regard to common standards and creation of legal/contractual documents to facilitate varied credit risk transfer transactions
- Engage with the public in a variety of forums to seek feedback and incorporate revisions and support FHFA progress reports to the public.