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FHFA takes another big step toward single security for Fannie Mae, Freddie Mac

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WASHINGTON —The Federal Housing Finance Agency issued a proposal Wednesday that would require mortgage giants Fannie Mae and Freddie Mac to align their policies on cash flows for current mortgage-backed securities, and eventually for a uniform security when it is implemented next year.

The plan is crucial for the successful adoption of a single uniform mortgage-backed security. It would also enhance liquidity and competition in the “to-be-announced” MBS market, the agency said.

Fannie and Freddie are slated to start issuing the new security through a common securitization platform in June 2019. The FHFA has said combining the two markets into a single market would increase liquidity and encourage market participation, which would ultimately benefit market participants and homeowners.

The FHFA wants Fannie Mae and Freddie Mac to standardize certain regulations before the common securitization platform launches next year.

Bloomberg News

“By instituting regulations that further standardize those products, the proposed rule and the UMBS would reduce complexity and the cost of analytics,” the agency said in its notice, referring to the uniform mortgage-backed security.

Freddie had started using the common security model in 2016, in what was referred to as Release 1 of the plan, and the second phase, which would allow both of the government-sponsored enterprises to use the single platform, was planned for 2018. However, due to lessons learned from Release 1, the implementation was delayed until 2019.

The FHFA also contended that this new proposal, along with the adoption of the single security, would better facilitate the transition to any form of future MBS market in potential housing finance reform legislation, because it would limit Fannie and Freddie’s advantages in infrastructure and liquidity — two major barriers to entry.

The plan was proposed in part as a response to industry concerns that when implemented, the single security may not be completely fungible — or interchangeable — because the differences between Fannie and Freddie policies might result in differing cash flows.

“FHFA recognizes that the market participants will need to accept the fungibility of the UMBS, regardless of which enterprise is the issuer, in order for the secondary market to realize the potential liquidity benefits,” the notice reads.

Investors have traditionally viewed the GSEs’ securities differently because of the variations in their payment schedules, prepayment speeds and liquidity, according to an Urban Institute report from August.

“If investors do not” see the UMBS as fungible, “they will value each issuance of the UMBS according to which enterprise’s securities back them, leading to a breakdown of a new security,” the report says.

The public has 60 days to comment on the proposal. The agency has specifically requested comment on the possible magnitude of the effects of the plan and the best way to estimate them, the benefits of standardization and the effects of the rule on the current and future state of competition in the secondary mortgage market.

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