FHFA Issues Proposed Rule for Uniform MBS

Written By: Joel Palmer, Op-Ed Writer

Earlier this month, the Federal Housing Finance Agency (FHFA) issued its proposed rule to require Fannie Mae and Freddie Mac to “align programs, policies, and practices” that affect the prepayment rates in their securities.

As previously announced, the new common security will be issued starting June 3, 2019.

The new rule, which has been years in the making, will affect the prepayment rates of “To-Be-Announced” (TBA)-eligible mortgage-backed securities. The rule’s objective is to enhance liquidity of these securities by “supporting their fungibility…without regard to which enterprise is the issuer.”

“FHFA has proposed this rule to ensure that Fannie Mae and Freddie Mac programs, policies, and practices that individually have a material effect on cash flows (including policies that affect prepayment speeds) are aligned and will continue to be aligned. The proposed rule defines a materially misaligned program, policy, or practice as one that causes a divergence of at least three percentage points in the one-month CPR for a cohort or divergence greater than the prevailing threshold set by FHFA per proposed § 1248.5(c).”

Freddie Mac securities have historically sold at a discount to Fannie’s due to a smaller trading volume and higher prepayment rates. FHFA has long wanted investors to consider the securities issued by the two enterprises to be interchangeable.

FHFA says the new rule would have the greatest positive impact on the following areas: liquidity, efficiency and competition.

FHFA writes in the rule document that combining the markets for Fannie and Freddie securities into a single market would increase the tradeable supply, “which would result in better execution and help to prevent squeezes in both markets.”

The agency believes these benefits would be accentuated for lesser traded securities, such as 30-year coupons of less than 3 percent and greater than 4.5 percent.

“FHFA also believes that the benefits of increased liquidity and improved execution will flow through to borrowers.”

In addition, “FHFA believes that standardizing Fannie Mae and Freddie Mac policies that affect cash flows to investors in TBA-eligible MBS will benefit market participants and homeowners in the same manner that market participants and homeowners benefit from the standardization that underlies TBA eligibility.”

The agency also contends that the rule will encourage competition between the two GSEs. It cited research from the Urban Institute that showed borrowers with Freddie Mac-owned loans often pay higher rates than those owned by Fannie Mae. That’s because under programs like the Home Affordable Refinance Program (HARP), Freddie does not have to compete with Fannie for these borrowers.

FHFA wrote in the proposed rule: “The Urban Institute contends that moving to the UMBS would remove Fannie Mae’s liquidity and pricing advantage, thereby boosting competition between Fannie Mae and Freddie Mac, with potential benefits to mortgage rates and the availability of mortgage credit.”

The Mortgage Bankers Association supports the common securitization platform. It says the CSP will:

•Be an upgrade from the current antiquated structures the GSEs currently rely on.

•Facilitate GSE reform by allowing multiple issuers to pool and issue qualifying securities in exchange for a future government guarantee.

•Improve liquidity in secondary mortgage markets by eliminating trading disparities that currently exist

There are some detractors in the industry. Experts at PIMCO, one of the largest participants in the MBS market, recently wrote that the CSP is not necessary because “the agency MBS market is already one of the most liquid bond markets there is.” The article further stated that “While we don’t question the good intentions of FHFA policymakers, we do question why they would continue to invest significant resources in an effort where the problem they seek to address is not actually a problem at all.”

Others are concerned about the quality of loans for investors. The reason is the possibility that the unified MBS will favor the worst performing loans that are cheaper to deliver.

FHFA invites interested parties to submit comments on the proposed rule via FHFA.gov.


About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.


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