The Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac remain on track to begin issuing common mortgage-backed securities (MBS) on a common trading platform on June 3, according to a new report from the Federal Housing Finance Agency (FHFA). The report describes several activities FHFA and the GSEs have undertaken to facilitate the GSEs’ transition to the common security and platform.
The common security, known as the Uniform Mortgage-Backed Security (UMBS), will replace the GSEs’ current MBS and will be traded through a Common Securitization Platform (CSP) jointly owned and developed by both firms. As part of the transition, Freddie Mac has been utilizing the CSP since November 2016 to sell its current single-family MBS, known as Participation Certificates.
FHFA says it expects the GSEs to meet the June 3 implementation deadline. The report outlines a number of outreach activities FHFA and the GSEs have performed to help industry participants prepare for the transition. These include conducting a survey with stakeholders to measure their awareness and readiness for the transition; holding a conference on the new UMBS for market participants; reaching out to foreign MBS investors; and hosting webinars for specific vendors. FHFA has also published a number of materials on the transition that are available on FHFA’s and/or the GSEs’ websites.
In addition, FHFA reports that federal agencies this year resolved two outstanding regulatory issues pertaining to the new UMBS and CSP. In February, FHFA sent a letter to the U.S. Securities and Exchange Commission (SEC) confirming a previous SEC staff position that, if a firm chooses to convert its Freddie Mac Participation Certificates to the new UMBS, such a change will have to be reported only as a minor modification of an existing security. In August, the Internal Revenue Service (IRS) published guidance clarifying that converting securities from Participation Certificates to UMBS will not be considered a "taxable event."
The report also explains FHFA’s efforts to close the prepayment speed gap between loans in Fannie Mae MBS and loans in Freddie Mac MBS. FHFA has long contended that, for the UMBS to be successful, investors must consider the securities issued by Fannie Mae and Freddie Mac to be interchangeable. Historically, Freddie Mac’s securities have sold at about a half-point discount to Fannie Mae securities, partly because the loans contained in Freddie Mac securities have higher prepayment rates than loans in Fannie Mae securities. Consequently, FHFA has worked to ensure Fannie Mae and Freddie Mac securities have prepayment rates that do not diverge by more than two percent for mortgages in the same cohort.
In September, FHFA published a proposed rule that would direct Fannie Mae and Freddie Mac to align those policies that impact the prepayment rates of mortgages in their securities, including product features. NCSHA further summarized the proposed rule on our blog. The agency has also begun publishing quarterly Prepayment Monitoring Reports to share with market participants the data FHFA uses to measure the consistency of prepayment speeds.