As of Monday, Freddie Mac and Fannie Mae mortgage-backed securities will be issued under a common security – the Uniform MBS – in a move some have called the biggest change to the MBS in a generation.
The Federal Housing Finance Agency is finally seeing its long-laid plans to create a common securities program for the GSEs come to fruition, a step the agency called “momentous” and said will cut costs for American homebuyers.
“The mortgage world has changed today,” FHFA Deputy Director Robert Fishman said on a call with reporters Monday.
What is UMBS and what will it really mean for the U.S. mortgage market?
Uniform MBS is a common security through which Fannie and Freddie will finance qualifying fixed-rate mortgage loans backed by one- to four-unit single-family properties. In essence, it will replace Fannie's MBS and Freddie's Participation Certificates so the two enterprises can trade in the same market.
Several years ago, the FHFA projected that full development of the common security would cost the GSEs more than $1 billion.
But, the FHFA has said that it expects to make that money back quickly thanks to the cost savings that will come from UMBS.
According to the FHFA, one of the key goals of the common security 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.
The FHFA previously projected that use of the UMBS will save $400 million to $600 million per year.
Previously, the GSEs issued securities through their own programs, which meant that an inevitable disparity persisted between the two. Fannie’s program has historically been far more liquid that Freddie’s, creating an imbalance between their trading volumes.
Now, FHFA will require Freddie to give homeowners’ mortgage payments to investors in 55 days rather than 45, which is consistent with Fannie’s guidelines. Bundling the securities together is also expected to better sync their prepayment speeds, which can have a great effect on the value of a pool of loans.
The idea is that combining both types of securities will increase the amount traded in a single day, enabling investors to accept lower returns and leading to a drop in yields, which may translate into lower interest rates for homebuyers.
The FHFA said there has already been $3 trillion in forward trading transactions under UMBS in recent months, and that as of Monday, those trades can be settled with UMBS issued by either enterprise, while the others can be settled throughout June.
Fishman, the FHFA deputy director, said the UMBS will benefit the housing market by eliminating the liquidity difference between the two GSEs.
“Today marks the official launch of the new Uniform Mortgage-Backed Security, a significant milestone that combines the separate Fannie Mae and Freddie Mac To-Be-Announced markets into one, bringing additional liquidity and efficiency to the market,” Fishman said in a statement. “By addressing structural issues and trading disparities, the UMBS will benefit taxpayers and the nation's housing finance system.”
On a call with reporters, Fishman said: “The goal of this project, this initiative, has been to increase overall liquidity of the MBS market by bringing two TBAs together. In addition, by reducing the pricing disparities from Fannie and Freddie securities, we should save taxpayer money.”
Mark Hanson, Freddie Mac’s senior vice president of securitization, said UMBS is one of the most significant accomplishments in the agency’s longstanding mission to improve housing finance.
“Americans will benefit from the efficiency and standardization brought about by this new common security. The success of the initiative is a direct result of Freddie Mac’s collaboration with Fannie Mae, Common Securitization Solutions, FHFA, and thousands across the U.S. housing finance industry,” Hanson said. “We are grateful for their hard work, and we join them in celebrating this achievement.”