FHFA issues update on its single security initiative

Written By: Joel Palmer, Op-Ed Writer

Fannie Mae and Freddie Mac are at least two years away from being able to issue a uniform mortgage-backed security to finance fixed-rate mortgages.

Last month, the Federal Housing Finance Agency (FHFA) released a report titled, “The Update on Implementation of the Single Security and the Common Securitization Platform.” The 15-page report detailed the progress made and the future timeline toward enabling Freddie Mac and Fannie Mae to issue a uniform mortgage backed security (UMBS).

The UMBS has been a goal of the FHFA since it was announced as part of a 2014 strategic plan for the conservatorship of Fannie and Freddie. The initiative has two objectives, according to FHFA.

One is to establish a single, liquid market for the mortgage-backed securities issued by Fannie and Freddie that are backed by fixed-rate loans. The other objective is to maintain the liquidity of this market over time.

“Achievement of these objectives would further FHFA’s statutory obligation and the Enterprises’ charter obligations to ensure the liquidity of the nation’s housing finance markets,” read the report. 

The document also stated that the initiative would reduce costs to both Freddie Mac and to taxpayers. This would be accomplished because there would no longer be a difference in liquidity of the Fannie Mae mortgage-backed security and Freddie Mac’s participation certificates.In essence, Freddie Mac would no longer subsidize the cost of securitizing single-family mortgage loans to make up for the trading disparity with Fannie’s securities.

According to FHFA, single-class resecuritizations of UMBS will be known as Supers and will be comparable to Fannie Mae Megas and Freddie Mac Giants. Multi-class resecuritizations will include tranched securities such as collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs). These may commingle UMBS or Supers originally issued by both Fannie Mae and Freddie Mac.

A major milestone occurred last November when Release 1 of the Common Securitization Platform (CSP) was implemented. 

The CSP is the technology infrastructure needed to perform the back office and securitization of the UMBS, including bond issuance, settlement, disclosure, bond administration, and tax reporting on behalf of both enterprises. Its implementation was necessary to establish a single, common system rather than building the capabilities into two legacy systems. Neither agency’s singular infrastructure can support the commingling of the other enterprise’s securities.

As of Release 1, Freddie Mac is using the CSP and testing its operations. Release 2 will enable both Freddie and Fannie to use the CSP.

That transition was originally scheduled to take place in 2018, but FHFA has moved implementation to the second quarter of 2019.

According to the recently published report, FHFA delayed Release 2 implementation after reviewing the implementation of Release 1. “The drivers of this anticipated implementation date include the demonstrated need for additional time for the development, testing, validation of controls, and governance processes necessary to have the highest level of confidence that the implementation will be both smooth and successful,” the report stated. 

FHFA also wants to allow more time for various stakeholders, including lenders, investors, dealers, and others, to prepare for the change. 

“All of these market participants will have to develop project plans, manage and test operational changes, implement new technologies or changes to existing technology, update legal agreements, and establish appropriate controls…As requested in feedback received from many industry participants, this announcement provides much more advance notice than the 12 months’ notice FHFA committed to in our original plan for the industry to undertake required readiness activities.”

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

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