The Federal Housing Finance Agency (FHFA) moved another step closer on Tuesday to its strategic goal of issuing a single mortgage-backed security (MBS) under the aegis of both of the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae. The agency has issued a request for input from interested stockholders on the security which is part of its efforts to develop a Common Securitization Platform (CSP).
Under the current plan the proposed Single Security would leverage the GSEs' existing security structures and would encompass many of the pooling features of the current Fannie Mae MBS and more of the disclosure framework of the current Freddie Mac Participation Certificate (PIC).
At a press conference held for background only on Tuesday afternoon representatives of the two GSEs and FHFA said the ultimate goal for the new structure is for the legacy MBS and PC securities to be fungible or transferable with the new security. Because so many features of the existing Fannie Mae MBS will be included in the new security an exchange option for legacy MBS might not be necessary but to achieve maximum market liquidity it is important to insure the fungibility of the Freddie Mac PCs. There are currently $2.7 trillion in Fannie Mae MBS and $1.5 trillion in Freddie Mac PCs outstanding.
The Single Security is to have seven key features.
1. It would be issued and guaranteed by either Freddie Mac or Fannie Mae. It would be a first level securitization with underlying collateral owned 100 percent by the relevant GSE and there would be no commingling of loans from the GSEs at this level.
2. The Single Security would have common features that exist in the current market including a payment delay of 55 days, pooling prefixes, minimum pool submission amounts, general loan requirements such as non-delinquent status and good title, seasoning requirements, and loan repurchase, substitution and removal guidelines
3. The initial focus of the Single Security would be the highly liquid market for TBA eligible fixed rate mortgages with emphasis on 15-year and 30-year loans but provisions for those of 10 and 20 year duration.
4. The security would continue to enable multiple lender pools.
5. Second level securitizations or re-securitizations of first-level securities would be permitted and these could contain comingled securities from the two GSEs and combinations of Single Securities and legacy securities.
6. The disclosure framework for the Single Security is closely aligned with that of Freddie Mac's PC disclosures
7. The GSEs would maintain their separate Servicing and Selling Guides and continue certain alignment activities as outlined in the 2014 Strategic Plan.
FHFA foresees the Single Security initiative as a multi-year effort and does not yet have a date for its implementation. However its intention is to implement the securities for both GSEs at the same time. In its request for input FHFA is inviting feedback on all aspects of the proposed Single Security structure but is particularly interested in feedback on four questions:
1. What key factors regarding TBA eligibility status should be considered?
2. What issues should be considered in seeking to ensure broad market liquidity for the legacy securities:
3. What operational, system, policy, or other effects on the industry and stakeholders should be considered?
4. What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption?
The deadline for input is October 13, 2014. More information on the proposed Single Security and details on submitting input are available at www.FHFA.gov.
