Fannie, Freddie single mortgage-backed security takes shape in new FHFA update

Details emerge as input still sought on structure

The Federal Housing Finance Agency on Friday reported on the progress made on the proposed single mortgage-backed security that would be issued by Fannie Mae or Freddie Mac.

Developing the Single Security is a key goal of FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac.

Finalizing the structure of the Single Security is a 2015 scorecard item for both companies and for Common Securitization Solutions, the joint venture between Fannie Mae and Freddie Mac that is advancing the work on this project.

The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities, and lower costs for borrowers and taxpayers.

Last year, FHFA issued a Request for Input on all aspects of a proposed structure for the Single Security.

“While the Single Security remains a multi-year initiative, we believe this Update represents another significant milestone we have reached in defining the structure and processes necessary to transition successfully to a Single Security,” said FHFA Director Melvin Watt. “Our objective is to continue to make progress on building a new securitization infrastructure for Fannie Mae and Freddie Mac that is adaptable for use by other secondary market participants in the future. FHFA therefore invites additional feedback on the decisions about the Single Security structure described in this Update,” Watt said.

The entire updated report can be read here

“FHFA’s Update should give everyone a sense of how the Single Security will be developed and the solid progress that has been made over the past year. We strongly believe in the Single Security’s potential for expanding liquidity in the TBA market, lowering housing finance costs, and making the housing finance system more competitive and resilient,” said Dave Lowman, executive vice president, Single-Family Business, Freddie Mac. “Freddie Mac is committed to expanding homeownership opportunities by working with FHFA, Fannie Mae, Common Securitization Solutions and other stakeholders to address the milestones ahead in bringing a Single Security to the market.”

Likewise Fannie Mae called the update an important milestone.

 “Fannie Mae continues to work closely with FHFA and Freddie Mac to develop the Single Security, with the goal of increasing liquidity in the housing finance market and creating a stronger system,” said Andrew Bon Salle, Executive Vice President, Single- Family Business, Fannie Mae. “Today’s Single Security Update is an important milestone, providing additional details on the features of the Single Security and the strong progress made to date by Fannie Mae, Freddie Mac and Common Securitization Solutions on implementation planning. We will continue to work with FHFA, Freddie Mac, and CSS to ensure we transition to the Single Security in a safe and sound manner.”

The full update details a number of changes to the Single Security structure recommended by respondents to the RFI and discusses FHFA’s decisions regarding those recommendations. FHFA’s decisions generally confirm the structure set forth in the RFI.

In addition, the update provides additional details about the Single Security structure in response to stakeholder feedback.

Based on the report, the FHFA’s determinations on the Single Security structure are as follows:

  1. Security Issuer and Guarantee Structure. Each Enterprise will issue and guarantee first-level Single Securities backed by mortgage loans that the Enterprise has acquired. The Enterprises will not cross-guarantee each other’s first-level securities. The Federal Home Loan Banks will not be an eligible issuer of Single Securities.
  2. Common Features. The key features of the new Single Security will be the same as those of the current Fannie Mae Mortgage-Backed Security (MBS), including a payment delay of 55 days.
  3. Loan Products in Scope. First-level Single Securities will finance fixed-rate mortgage loans now eligible for financing through the “To-Be-Announced” (TBA) market.
  4. Multiple-Lender Pools. Lenders will continue to be able to contribute mortgage loans to multiple-lender pools. 
  5. Re-Securitizations. Each Enterprise will be able to issue second-level Single Securities (re-securitizations) backed by first- or second-level securities issued by either Enterprise. In order for a legacy Freddie Mac Participation Certificate to be re-securitized, the investor would have to first exchange the PC for a Single Security issued by Freddie Mac, so that the payment date of all of the securities in the collateral pool backing the re-securitization would be the same. To clarify the counterparty risk posed by commingled re-securitizations, this Update provides an analysis of the counterparty risk exposure of investors under the Enterprises’ current securitization programs and the Single Security. 
  6. Disclosures. The loan- and security-level disclosures for Single Securities will closely resemble those of Freddie Mac PCs. This Update provides details about these disclosures. 
  7. Alignment of Enterprise Programs, Policies, and Practices. Current Enterprise policies and practices related to the removal of mortgage loans from securities (buyouts) are substantially aligned today and will be generally similar and aligned for purposes of the Single Security. This Update provides a summary of these policies and practices. FHFA and the Enterprises will carefully assess the potential effect on prepayment speeds of any potential changes in Enterprise programs, policies, and practices developed or considered in the future. Maintaining the current high degree of similarity between the prepayment speeds of the Enterprises’ securities is an important objective for FHFA. 
  8. Legacy Fannie Mae MBS and Freddie Mac PCs. Freddie Mac will offer investors the option to exchange legacy PCs for comparable Single Securities backed by the same mortgage loans and will compensate investors for the cost of the change in the payment delay. This Update provides a description of the exchange program for legacy PCs. Fannie Mae will not offer an exchange option for legacy MBS because FHFA expects investors to treat them as fungible (interchangeable) with Single Securities. 

“FHFA and the Enterprises will continue careful, deliberative engagement with industry and other stakeholders as the Single Security structure is refined and as an implementation schedule is developed,” the update says. “That process will provide ongoing opportunity for stakeholder input and dialogue and will allow FHFA and the Enterprises to modify the Single Security structure and implementation schedule as appropriate to mitigate any risk of market disruption.”  

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