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FHFA Proposes New Single Fannie-Freddie Security
Practical Law Legal Update 2-578-6145 (Approx. 3 pages)
FHFA Proposes New Single Fannie-Freddie Security
by Practical Law Finance
| Published on 21 Aug 2014 • USA (National/Federal) |
The Federal Housing Finance Agency (FHFA) proposed a single security structure that would replace and be fungible with both the Fannie Mae Mortgage-backed Security (Fannie Mae MBS) and the Freddie Mac Participation Certificate (Freddie Mac PC).
On August 12, 2014, the Federal Housing Finance Agency (FHFA) proposed a single security structure that would replace and be fungible with both the Fannie Mae Mortgage-backed Security (Fannie Mae MBS) and the Freddie Mac Participation Certificate (Freddie Mac PC). These two securities both trade in the TBA market, which is a type of forward market in mortgage-backed securities (MBS). In the TBA market, only six criteria are agreed to on the trade date, and the specific security that will fulfill a trade is not designated until 48 hours prior to the settlement date. The six agreed upon criteria include the:
- Issuer.
- Maturity.
- Coupon rate.
- Face value.
- Price.
- Settlement date.
Historically, in the TBA market, Fannie Mae MBS have traded more favorably than Freddie Mac PCs. This disparity reduces liquidity in the secondary mortgage market and adversely impacts lenders, investors and borrowers. Creating a single enterprise security that would be fungible with both the Fannie Mae MBS and the Freddie Mac PC is designed to increase liquidity in these securities.
The single security structure would:
- Encompass many of the pooling features of the current Fannie Mae MBS and be fungible with the current Fannie Mae MBS.
- Maintain most of the disclosure framework of the current Freddie Mac PC, and, if necessary, include an option to exchange legacy Freddie Mac PC for a comparable single structure security to ensure fungibility with the Fannie Mae MBS.
- Be issued and guaranteed by either Fannie Mae or Freddie Mac, and would be a "first level" securitization that would contain either 100% mortgages acquired by Fannie Mae or 100% mortgages acquired by Freddie Mac, and would not allow for commingling of mortgages between the enterprises in this first level. However, the securities would allow continued use of multi-lender pools within each enterprise, which are currently know as Fannie Mae Majors or Freddie Mac Multi-lender pools.
- Initially focus on TBA-eligible fixed rate mortgages, emphasizing 30-year and 15-year loans.
- Allow for re-securitizations that would contain first level securitizations issued by either Fannie Mae or Freddie Mac or a combination of the two.
- Contain common features that include:
- a payment delay of 55 days;
- pooling prefixes;
- mortgage coupon pooling requirements;
- minimum pool submission amounts;
- General loan requirements such as first lien position, good title and non-delinquent status;
- seasoning requirements; and
- loan repurchase, substitution and removal guidelines.
Currently, the FHFA does not have a date for the release of the single security structure, but is seeking public comment. The FHFA intends to release the security, the re-securitization capabilities thereof and the potential ability to exchange the current Freddie Mac PC for the single security simultaneously in order to minimize market disruption. The FHFA is seeking public comments on all aspects of the single security structure until October 13, 2014, specifically on the following:
- What key factors regarding TBA eligibility should be considered?
- What should be considered to ensure broad market liquidity?
- What operational systems and policies or investment guidelines should be considered?
- What can be done to minimize market disruption with the introduction of a single security?
Comments can be submitted on the FHFA website.
For more information on securitization, see Practice Note, Securitization: US Overview.