A key objective of the Federal Housing Finance Agency is to execute various risk transfer transactions aimed at reducing the enterprises’ footprint in housing finance.
As a result, the need for a move back to a mortgage market financed predominately by private capital is essential and the FHFA outlined initial steps it will take to do so, including the creation of a new business entity between Fannie Mae and Freddie Mac.
The FHFA issued a progress report Tuesday on steps being taken to establish a Common Securitization Infrastructure for residential mortgage-backed securities, reflecting feedback from a broad cross-section of industry experts that responded to the agency’s white paper, which set forth the proposal for a new securitization platform.
The plan is to scale back the secondary mortgage operations of the government-sponsored enterprise via the single platform, though exactly how is an ongoing development.
"The design of the common securitization infrastructure will, in the future, facilitate increase in the scale and ease of execution of such transactions. Therefore, the infrastructure will be designed to be flexible so as to enable policymakers to have a choice about the role of the federal government in a future housing financing system – including a choice about the degree of mortgage credit risk directly assumed by the government," the report explained.
The CSI updates are discussed in two components including building a Common Securitization Platform and creating a Contractual and Disclosure Framework to enhance transparency and investor protections in RMBS.
Included in the CSP is the establishment of a Bond Administration, which will be responsible for establishing the security administration and reporting, as well as making data available for ongoing investor reporting for each payment cycle.
Bond Administration will also support both first-level securitizations — securities backed by directly by loans — and second-level resecuritizations — securities backed by existing securities.
The platform will collect funds due to investors generated by the collateral, loans or existing securities, and provide such funds to the user for investment in eligible investments.
"Similar to the Master Servicing functions, the Bond Administration module will focus on those functions that can leverage straight-through processing and that are rules-based," according to the FHFA.
For example, while the CSP will collect funds due to investors, it will not make any fund investment decisions prior to disbursement. Such decisions will be the responsibility of the issuer under the new CSP.
When the agency asked for feedback, many respondents asked for greater clarity on ownership and governance of the CSP.
The current plan is to initially structure the CSP as co-owned by the GSEs during which time key components of the platform will be designed, built and tested.
Another request was to specifically allow certain mortgage market participants have access to the CSP, including lenders, mortgage insurers and independent trustees
"Some of these market participants (servicers and the Enterprises) will have immediate access to the CSP; others will have acces as the platform evolves over time. Broad, open access remains the long-term goal," the report explained.
On a similar note, respondent issues raised with the CDF include taking into account the broader private market challenges, specifically regulatory requirements and uncertainties.
For example, the efforts by regulators to implement the risk retention requirements of the Dodd-Frank Act and to define a Qualified Residential Mortgage standard as opposed to the recently Qualified Mortgage standard were cited as a factor that will affect securitization markets.
In light of the importance of this initiative to the house finance system, FHFA has directed Fannie Mae and Freddie Mac to move forward on the development of the CSP.
This year, the enterprises are expected to establish initial ownership and governance structure for the platform as well as develop the design, scope and functional requirements for the CSP’s modules.
Additionally, the enterprises will develop a multi-year plan, inclusive of CSP build, test and deployment phases.
Similarly, the enterprises will undertake various implementations related to the CDF including identifying and developing standards in data, disclosure and seller/servicer contracts.
Additionally, the GSEs will develop and executive work plans for alignment activities between the enterprises with regard to common standards and creation of documents to facilitate varied credit risk transfer transactions.