FHFA Unveils New Single Security Plan
The Federal Housing Finance Agency lifted the curtain Tuesday on a proposal to develop a single mortgage backed security that would combine elements of each GSE’s existing MBS program.
The single MBS program would encompass many of the pooling features of the current Fannie Mae Mortgage Backed Security and most of the disclosure framework of the current Freddie Mac Participation Certificate program, FHFA said.
The FHFA also noted that the single MBS is the logical product from developing a Common Securitization Platform that would also draw upon part of each existing GSE’s MBS programs.
“The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities by creating a Single Security that is eligible for trading in the to-be-announced market,” the regulator wrote in the initiative’s announcement.”
The FHFA said it is requesting public input on all aspects of the proposed Single Security structure and is especially focused on issues regarding the transition from the current system to a single security. Specifically, the FHFA said it is seeking feedback regarding TBA eligibility, legacy Fannie Mae and Freddie Mac securities, potential industry impact of the Single Security initiative and the risk of market disruption.
The initiative is another step in a multi-year process to reform and remodel the secondary mortgage market in the absence of legislation to do so. The latest effort to at secondary mortgage market reform stalled in Congress after it passed the Senate Banking, Housing and Urban Affairs Committee but failed to pass the full Senate.
The FHFA plan, launched under former FHFA Acting Director Edward DeMarco, envisioned the construction of single platform to securitize mortgages into mortgage backed securities the market would sell to investors. Moving to a single MBS that will combine elements from both Fannie Mae and Freddie Mac will help develop that single platform, the FHFA said.
The single security will also act to remove the current price gap between the two GSE’s securities, the FHFA said.
“The enterprises currently issue two different mortgage securities that are not interchangeable with one another, and Freddie Mac’s security has historically traded less favorably compared to Fannie Mae’s security,” the FHFA wrote in its proposal.
As part of its effort to create a common security, the FHFA and the enterprises will define the parameters for a single common security, including security characteristics and disclosure requirements, which should reduce the trading value disparities between the two organization’s securities, the regulator added.
FHFA said it asked for input into the proposal because it wanted to transition to offering a single MBS while causing the least disruption to the existing market.
Executives with both CUNA and NAFCU offered concerns about price and liquidity.
“CUNA supports measures that improve the efficiency and liquidity of the mortgage market,” CUNA General Counsel Eric Richard wrote in an emailed statement. “However, we need to continue studying the implications of this proposal for its impact on the prices credit unions receive for the sales of their mortgages to the GSEs, as well as the proposal’s potential impact on the values of existing MBS investments.”
“NAFCU will carefully review the proposal to make sure that the marketability of the current GSE mortgage-backed security is not hindered under the new common MBS,” wrote Michael Coleman, NAFCUs director of regulatory affairs, also in an email.
NAFCU will also try to make sure credit unions selling loans to the GSEs “are not negatively impacted, especially when it comes to receiving a fair price reflecting the quality of their loans,” he added.
The Independent Community Bankers of America also pointed out smaller mortgage issuers would be most interested in making sure the single MBS retains a high degree of liquidity as investment vehicles.
“Community banks that sell to the government sponsored enterprises typically only sell to one GSE. This means that community banks wouldn’t likely see the trading difference between the securities as they sell their loans for cash rather than create mortgage-backed securities pools,” President/CEO Camden R. Fine said in a statement about the proposal. “Since community banks are investors in GSE securities, ICBA will review the proposal carefully to ensure that the marketability of the current GSE mortgage-backed security is preserved while balancing the price execution components for those institutions selling loans to the GSEs.”