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From Banking and Finance Law Daily, August 13, 2014

FHFA seeks comments on GSE Single Security structure

By John M. Pachkowski, J.D.

The Federal Housing Finance Agency is seeking input on a proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac (GSEs). Noting that this is a multi-year effort, the FHFA does not have a date when the Single Security would be implemented.

The Single Security project is a key goal of FHFA’s 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and is a 2014 Scorecard item for both GSEs.

Improved liquidity. The creation of a Single Security is intended to improve the overall liquidity of the current Fannie Mae Mortgage Backed Security (MBS) and Freddie Mac Participation Certificate (PC) since these securities currently are not interchangeable with one another. In addition, the Single Security will be eligible for trading in the to-be-announced (TBA) market.

Leveraging existing features. The Single Security framework would leverage existing features of the Fannie Mae MBS and the Freddie Mac PC. For example, the Single Security would align with many of the key features of the current Fannie Mae MBS, such as the timing of payments to investors at 55 days. The Single Security would also employ a common disclosure framework that aligns with current Freddie Mac PC disclosures and would include common data element names and definitions, calculations, and data derivations. In addition, the current purchase and guarantee framework for a Fannie Mae MBS or a Freddie Mac PC that exists would be used in the Single Security framework.

Pooling and re-securitizations. Other features of the Single Security Framework include multiple-lender pools and re-securitizations. The multiple-lender pools would enable the aggregation of smaller mortgage loan deliveries; and provide smaller-volume lenders access to the secondary market and the ability to obtain better security price execution. The re-securitization capability would serve to expand secondary mortgage market liquidity and may also help to reduce the costs of administering multiple securities.

Request for input. In order to achieve maximum secondary market liquidity, the FHFA is especially interested in views on how to preserve TBA eligibility and ensure that legacy Fannie Mae MBSs and Freddie Mac PCs are fully fungible with the Single Security. The FHFA is also particularly interested in feedback on the following:

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

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

  3. 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?

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

Stakeholder reaction. Andrew Bon Salle, Executive Vice President of Single-Family Underwriting, Pricing, and Capital Markets at Fannie Mae, stated, “We are committed to working with FHFA and Freddie Mac as we transition to a single security. The goal of moving to a single security is to build a deeper, more liquid mortgage market. The development of a single security will be a multi-year effort.”

Dave Lowman, Executive Vice President of Freddie Mac’s Single Family Business, called the request for input “a milestone on the path towards a more competitive and resilient housing finance system.” He added, “We share FHFA's vision of a more liquid and transparent single security that can make the secondary market even more efficient and keep homeownership within reach of America's working families.”

David H. Stevens, president and CEO of the Mortgage Bankers Association, said, “Today’s announcement takes what many told us was an unworkable fantasy and brings it closer to reality. The move to a single security will enable the two GSEs to compete on a more level playing field, and this competition will be beneficial to both homebuyers and lenders. In addition, it will be an important piece to help transition the market to any new future structure by providing a more flexible and efficient way of trading securities.”

PLS initiative. In addition, to the FHFA’s Single Security project, the Treasury Department, in recent months, had begun its own initiative to revive the private label securities (PLS) market so as to reduce the government’s footprint in the mortgage market and decrease the risk to taxpayers. As part of its efforts, the Treasury Department sought public input to understand obstacles to the growth of the PLS market and ways to encourage private capital to play a larger role in taking mortgage risk outside of government-supported channels (see Banking and Finance Law DailyJune 27, 2014 and Aug. 11, 2014).

Companies: Fannie Mae; Freddie Mac; Mortgage Bankers Association

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