The Federal Housing Finance Agency lifted the curtain Tuesday ona proposal to develop a single mortgage backed security thatwould combine elements of each GSE's existing MBS program.

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The single MBS program would encompass many of the poolingfeatures of the current Fannie Mae Mortgage Backed Security andmost of the disclosure framework of the current Freddie MacParticipation Certificate program, FHFA said.

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The FHFA also noted that the single MBS is the logical productfrom developing a Common Securitization Platform that would alsodraw upon part of each existing GSE's MBS programs.

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“The Single Security project is intended to improve the overallliquidity of Fannie Mae and Freddie Mac mortgage-backed securitiesby creating a Single Security that is eligible for trading in theto-be-announced market,” the regulator wrote in the initiative'sannouncement.”

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The FHFA said it is requesting public input on all aspects ofthe proposed Single Security structure and is especially focused onissues regarding the transition from the current system to a singlesecurity. Specifically, the FHFA said it is seeking feedbackregarding TBA eligibility, legacy Fannie Mae and Freddie Macsecurities, potential industry impact of the Single Securityinitiative and the risk of market disruption.

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The initiative is another step in a multi-year process to reformand remodel the secondary mortgage market in the absence oflegislation to do so. The latest effort to at secondary mortgagemarket reform stalled in Congress after it passed the Senate Banking, Housingand Urban Affairs Committee but failed to pass the full Senate.

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The FHFA plan, launched under former FHFA Acting Director EdwardDeMarco, envisioned the construction of single platform tosecuritize mortgages into mortgage backed securities the marketwould sell to investors. Moving to a single MBS that will combineelements from both Fannie Mae and Freddie Mac will help developthat single platform, the FHFA said.

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The single security will also act to remove the current pricegap between the two GSE's securities, the FHFA said.

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“The enterprises currently issue two different mortgagesecurities that are not interchangeable with one another, andFreddie Mac's security has historically traded less favorablycompared to Fannie Mae's security,” the FHFA wrote in itsproposal.

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As part of its effort to create a common security, the FHFA andthe enterprises will define the parameters for a single commonsecurity, including security characteristics and disclosurerequirements, which should reduce the trading value disparitiesbetween the two organization's securities, the regulator added.

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FHFA said it asked for input into the proposal because it wantedto transition to offering a single MBS while causing the leastdisruption to the existing market.

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Executives with both CUNA and NAFCU offered concerns about priceand liquidity.

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“CUNA supports measures that improve the efficiency andliquidity of the mortgage market,” CUNA General Counsel EricRichard wrote in an emailed statement. “However, we need tocontinue studying the implications of this proposal for its impacton the prices credit unions receive for the sales of theirmortgages to the GSEs, as well as the proposal's potential impacton the values of existing MBS investments.”

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“NAFCU will carefully review the proposal to make sure that themarketability of the current GSE mortgage-backed security is nothindered under the new common MBS,” wrote Michael Coleman, NAFCUsdirector of regulatory affairs, also in an email.

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NAFCU will also try to make sure credit unions selling loans tothe GSEs “are not negatively impacted, especially when it comes toreceiving a fair price reflecting the quality of their loans,” headded.

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The Independent Community Bankers of America also pointed outsmaller mortgage issuers would be most interested in making surethe single MBS retains a high degree of liquidity as investmentvehicles.

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“Community banks that sell to the government sponsoredenterprises typically only sell to one GSE. This means thatcommunity banks wouldn't likely see the trading difference betweenthe securities as they sell their loans for cash rather than createmortgage-backed securities pools,” President/CEO Camden R. Finesaid in a statement about the proposal. “Since community banks areinvestors in GSE securities, ICBA will review the proposalcarefully to ensure that the marketability of the current GSEmortgage-backed security is preserved while balancing the priceexecution components for those institutions selling loans to theGSEs.”

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