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FHFA officially sets date for Fannie, Freddie single security

Uniform Mortgage-Backed Security coming on June 3, 2019

After years of work and planning, the development of a single mortgage-backed security that will be issued by both Fannie Mae and Freddie Mac is nearly complete.

The Federal Housing Finance Agency announced Wednesday that the government-sponsored enterprises will officially begin issuing the single security, called the Uniform Mortgage-Backed Security, on June 3, 2019.

The date is on target with what the FHFA said last year around this time, when it delayed the implementation of the single security from 2018 to 2019.

Now, citing the progress made in the development of the single security, the FHFA is officially setting the date for when the GSEs will stop issuing their disparate TBA-eligible mortgage-backed securities and begin issuing the Uniform Mortgage-Backed Security.

“The transition to the new, common security requires planning, investment, and preparation by a wide variety of market participants,” FHFA Director Mel Watt said. “We have now set the specific date that the Enterprises will start issuing the UMBS and I urge the industry to get ready now to ensure smooth, successful implementation.”

The single security is a joint initiative from Fannie and Freddie to develop a single mortgage-backed security that will be issued by the GSEs to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties.

The single security will be issued via the Common Securitization Platform, which is a technology and operational platform that is being developed by Common Securitization Solutions, the company formed in 2014 by Fannie and Freddie to facilitate the design and implementation of the single GSE bond.

The CSP will perform many of the core back office operations for the single security, as well as most of the GSEs' current securitization functions for single-family mortgages.

As part of the first phase of the single security rollout, Freddie Mac began using the Common Securitization Platform in 2016 for certain functions such as data acceptance, issuance support, and bond administration activities related to its current single-class, fixed-rate, mortgage-backed securities.

According to the FHFA, CSS has been using the CSP to process about 1,000 new securities each month and performing monthly bond administration functions related to 260,000 single-class securities backed by approximately 9.8 million loans.

When the UMBS officially launches on June 3, 2019, Fannie will join Freddie in using the CSP and CSS operations for these functions.

Additionally, CSP and CSS operational capabilities will expand to include the administration of multi-class securities and commingled Enterprise UMBS and the production of UMBS disclosures, the FHFA said. 

At that point, CSS and the CSP will be performing bond administration functions for about 900,000 securities backed by nearly 26 million loans.

As for why the FHFA made the announcement now, the agency said that certain “critical milestones” have been achieved in the development process and the agency also wants to provide market participants with “certainty” about the timing of the transition to UMBS and allow them ample time to ensure a smooth transition.

According to the FHFA, the “critical milestones” that were achieved are: completion of key application development for issuance of the UMBS on the CSP, completion of system-to-system testing, and initiation of end-to-end (pre-parallel) testing.

The development of the single security first began in 2012 and may end up costing the GSEs more than $1 billion to implement.

Last year, the FHFA said that it expected to make that money back quickly thanks to the cost savings that will come from the single security.

According to the FHFA, one of the key goals of the single security project is to reduce the costs to Freddie Mac and taxpayers that come from the “persistent difference in the liquidity of Fannie Mae MBS and Freddie Mac PCs.”

That “persistent difference in liquidity” imposed “significant annual costs” on Freddie Mac, and ultimately on taxpayers, the FHFA said, because it lowers the amounts available for dividend payments by Freddie Mac to the Department of the Treasury under the Senior Preferred Stock Purchase Agreement.

Last year, the FHFA projected that use of the UMBS will save $400 million to $600 million per year.

“The Federal Housing Finance Agency’s announcement today provides market participants with important clarity on the June 2019 implementation of the new Uniform Mortgage-Backed Security,” Freddie Mac’s executive vice president of single-family business, David Lowman, said in a statement.

“With the first UMBS issuance in June, forward trading will likely occur in the first quarter of 2019. We encourage all participants to continue with their preparation to allow for a smooth transition,” Lowman continued.

“With our implementation in 2016 of the Common Securitization Platform, we paved the way for a combined Freddie Mac and Fannie Mae $3.5 trillion market of To-Be-Announced UMBS,” Lowman added. “We remain committed to working with the industry, under the direction of FHFA, to ensure the readiness of all parties involved in this complex undertaking.”

Andrew Bon Salle, executive vice president of single-family business at Fannie Mae, added: “Today's announcement provides additional clarity on the timeline for implementation of the Uniform Mortgage-Backed Securities. Working with FHFA, Freddie Mac, and Common Securitization Solutions, we are focused on providing transparency to ensure market participants have the time to plan for and understand this transition. Our goal is to maintain a highly liquid housing finance market and create a stronger finance system.”

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