FHFA takes next step to single GSE bond

Plan would create common securitization for Fannie and Freddie

Based on his actions of late, Mel Watt is certainly proving to be a man of his word. In the first public speech as director of the Federal Housing Finance Agency, Watt made it clear that the FHFA is considering a new infrastructure for the securitization functions of Fannie Mae and Freddie Mac.

During his May speech at the Brookings Institution, Watt said that adjusting the way Fannie and Freddie securitize mortgages was one of the FHFA's key goals.

“After extensive discussion within FHFA and with the Enterprises, we have clarified that the agency’s top objective for the Common Securitization Platform is to make sure that it works for the benefit of Fannie Mae and Freddie Mac,” Watt said at the time.

“Over the last four months, we have identified the risks involved in transitioning to a common securitization platform and reviewed how to manage those risks, Watt continued. “We found that, because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time.”

Watt said that there could be serious repercussions to the entire housing finance market if the changes are done incorrectly. “As a result, our decision has been to ‘de-risk’ this project,” he said. “Moving forward, we will focus our efforts on creating a common securitization platform that can undertake Fannie Mae and Freddie Mac’s current securitization operations.”

Watt echoed that point in his exclusive interview in the August issue of HousingWire Magazine. In that interview, Watt said that increasing liquidity in the housing market was one of his main goals and that a common securitization between the GSEs could be a mechanism to bring more private capital into the market.

“We turned a corner, not because we didn’t think the old strategic plan was an important plan for when it was implemented,” Watt said in the interview. “It is to recognize that the primary role of Fannie and Freddie is no longer to stop the bleeding in mortgages, but rather in now providing a liquid position to the housing finance market.”

Now, Watt and the FHFA are now one step closer to bringing those plans to fruitition, by first simplifying the securities that Fannie and Freddie offer. On Tuesday, the regulator released its proposal for a single security to be offered by both Fannie and Freddie, which was first rumored several weeks ago.

The proposal calls for a “Single Security” that would encompass many of the features of the existing Fannie and Freddie securitization structure, which the FHFA said is necessary to “achieve maximum market liquidity.”

According to the FHFA, the new security would “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.”

Each single security would be issued and guaranteed by either Fannie Mae or Freddie Mac. Under the new plan, the single security would be a first-level securitization containing underlying mortgage loans that were acquired 100% by Fannie or 100% by Freddie.

The Single Security would have several features that are “common” in the current market, including:

  • A payment delay of 55 days
  • Pooling prefixes
  • Mortgage coupon pooling requirements
  • Minimum pool submission amounts
  • General loan requirements such as first lien position, good title, and non-delinquent status
  • Seasoning requirements
  • Loan repurchase, substitution and removal guidelines

In the new securitization format, there would be no “commingling” of loans purchased by Fannie or Freddie at the first level of securitization, which is how the GSEs’ securitizations operate currently.

“FHFA’s goal for the proposed Single Security structure is for legacy Fannie Mae MBS and legacy Freddie Mac PCs to be fungible with the Single Security for purposes of fulfilling ‘to-be-announced’ contracts,” the FHFA said.

“Because the proposed Single Security design would include most of the features of the current Fannie Mae MBS, an exchange option for legacy Fannie Mae MBS to Single Securities may not be necessary,” the FHFA continued.

“To achieve the goal of maintaining maximum market liquidity, it is important to ensure that the legacy Freddie Mac PC is fully fungible with the Single Security as well. Therefore, if necessary, investors would be offered an option to exchange a legacy PC for a comparable Single Security.”

The “highly liquid” TBA market will be the initial focus of the plan, with an emphasis on 30-year and 15-year loans, the FHFA said.

Multi-lender pools would also be eligible for the single security. “These programs enable the aggregation of smaller mortgage loan deliveries, usually by smaller-volume lenders, into a larger, more diversified pool,” the FHA said. “This aggregation feature is an important way for smaller- volume lenders to access the secondary market and obtain better security price execution.”

The proposal also would allow for “re-securitizations,” which are second-level securitizations of the single securities issued by either GSE. “Re-securitizations would contain underlying first-level securities, which could be securities issued entirely by Fannie Mae, entirely by Freddie Mac, or commingled securities issued by both Enterprises.”

The FHFA said that the implementation of the single security is a project that will take “multiple years,” and that despite the U.S. government’s position as conservator of the GSEs, the conversion to the single security would not require legislative approval.

The release of the new plan is the first step in that non-legistlative process.

The FHFA’s purpose in releasing the proposal is to seek input from the public on the plan and its structure.

“A highly liquid and fully functioning secondary mortgage market is important to the success of our nation’s housing finance system,” the FHFA said in a statement. “In order to achieve maximum secondary market liquidity, FHFA is especially interested in views on how to preserve TBA eligibility and ensure that legacy MBS and PCs are fully fungible with the Single Security.”

To that end, the FHFA released four specific questions that it is seeking feedback on. Those questions are:

What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?

What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?

As discussed above, this is a multi-year initiative with many stakeholders. What operational, system, policy (e.g., investment guideline), or other effects on the industry should be considered?

What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption?

Input is due by October 13.

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