FHFA Issues Final Rule on Uniform Mortgage-Backed Security
The Federal Housing Finance Agency yesterday issued a final rule that requires Fannie Mae and Freddie Mac to align programs, policies and practices that affect the cash flows of “To-Be-Announced”-eligible Mortgage-Backed Securities.
The final rule (https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/UMBS%20Final%20Rule%20for%20Web.pdf) addresses feedback expressed by commenters (including the Mortgage Bankers Association) on the Notice of Proposed Rulemaking by refining alignment requirements to assure market participants that the Enterprises will maintain consistent cash flows and makes explicit the potential consequences to the GSEs for misalignment. The preamble to the final rule also notes that FHFA has instructed the Enterprises to lower the maximum mortgage note rate eligible for inclusion in an MBS.
These requirements apply to both the Enterprises’ current offerings of TBA-eligible MBS and to the new Uniform Mortgage-Backed Security, which the GSEs will begin issuing June 3.
“This rule demonstrates FHFA’s commitment to the success of the UMBS, which will promote liquidity and efficiency in the secondary mortgage market,” said FHFA Acting Director Joseph Otting.
In a November 16 letter to FHFA, MBA said it supports development of both the UMBS and the Common Securitization Platform (a joint venture of Fannie Mae and Freddie Mac to administer the UMBS), “which together will represent a vastly improved single-family secondary mortgage market infrastructure. A formal rulemaking to codify processes and procedures for substantially aligned cash flows between issuers should bring greater certainty to market participants and stimulate increased investor demand, which should in turn generate significant benefits for borrowers and taxpayers.”
“Development of the [Uniform MBS] and the Common Securitization Platform…will represent a vastly improved single-family secondary mortgage market infrastructure,” MBA said.
MBA noted the Single Security–a longtime objective of MBA in its 2017 white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (https://www.mba.org/issues/gse-reform)–should increase the tradeable supply of securities with a single market, resulting in “enhanced liquidity and better execution that drives down the yields demanded by investors, which would then flow through to borrowers in the form of lower average mortgage interest rates.”
The letter also notes MBA’s belief in the importance of “robust competition” among guarantors in the secondary market, noting however, competition based on the liquidity of securities that are otherwise substantially aligned across collateral type, credit risk, disclosures and other relevant features does not benefit investors, lenders or borrowers. “FHFA is correct to focus competition between the Enterprises on factors such as product offerings, technology and customer service,” MBA said. “These are the areas in which competition leads to innovation or better execution, which then produces more efficient markets and lower costs for borrowers. Simply put, the liquidity of their securities should not be a basis for competition between the Enterprises, and there is no compelling reason for Fannie Mae and Freddie Mac TBA-eligible securities to trade in separate markets.”
The final rule becomes effective 60 days after publication in the Federal Register.
