FHFA Division of Conservatorship REQUEST FOR INPUT: PROPOSED SINGLE SECURITY STRUCTURE August 12th 2014
This Request for Input outlines the proposed structure of a Single Security to be issued and guaranteed by Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (the Enterprises). The Federal Housing Finance Agency’s (FHFA’s) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac (2014 Strategic Plan) includes the goal of developing a single Enterprise mortgage-backed security as part of the efforts to build a Common Securitization Platform (CSP). In order to advance the early stages of this multi-year initiative, FHFA seeks public input on the proposed Single Security structure that is outlined below.
Maintaining a highly liquid secondary mortgage market is a fundamental requirement for the success of the Single Security. In order to achieve maximum market liquidity, the proposed Single Security would leverage the Enterprises’ existing security structures. The proposal would encompass many of the pooling features of the current Fannie Mae Mortgage Backed Security (MBS) and most of the disclosure framework of the current Freddie Mac Participation Certificate (PC). The following sections provide details on the features of the proposed Single Security.
FHFA’s goal for the proposed Single Security structure is for legacy Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) MBS and legacy Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) PCs (legacy securities) to be fungible with the Single Security for purposes of fulfilling “to-be-announced” (TBA) contracts. Because the proposed Single Security design would include most of the features of the current Fannie Mae MBS, an exchange option for legacy Fannie Mae MBS to Single Securities may not be necessary. To achieve the goal of maintaining maximum market liquidity, it is important to ensure that the legacy Freddie Mac PC is fully fungible with the Single Security as well. Therefore, if necessary, investors would be offered an option to exchange a legacy PC for a comparable Single Security.
The development of the Single Security will be a multi-year effort. FHFA and the Enterprises will continue to seek input and to work with stakeholders throughout the process to achieve the goal of improving overall secondary mortgage market liquidity while mitigating any risk of market disruption.
Fannie Mae, Freddie Mac: Proposed Single Security Structure – Background
As outlined in the 2014 Strategic Plan, FHFA is prioritizing ways to improve the overall liquidity of the Enterprises’ mortgage-backed securities. This includes the development of a Single Security that will reduce trading value disparities between Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) MBS and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) PCs. The different mortgage securities currently issued by the Enterprises are not fungible with one another, and Freddie Mac PCs have historically traded less favorably than Fannie Mae MBS.
Fannie Mae MBS and Freddie Mac PCs trade in the TBA market, which is a type of forward market in mortgage-backed securities. The actual security to be delivered to fulfill a TBA trade is not designated at the time the trade is made. Rather, on the trade date, six criteria are agreed on: the issuer, the maturity, the coupon rate, the face value, the price, and the settlement date. The specific securities delivered to complete the trade are “to be announced” 48 hours prior to the settlement date. These features create a very efficient system for forward trading in mortgage-backed securities.
The TBA market is an important contributor to a strong, vibrant and highly liquid secondary mortgage market, which creates many benefits for taxpayers, lenders, investors and borrowers. This serves to make more capital available for lending, enables broad lender participation, and reduces costs throughout the housing finance system. In fact, TBA market liquidity can also translate to important borrower benefits in the form of lower mortgage rates, more efficient lending processes, lower transaction costs, and the ability to “lock in” the interest rate on a mortgage prior to closing on the loan.1 As a result, preservation of the TBA market for Enterprise mortgage-backed securities is an important consideration in the development of the Single Security.
The 2014 FHFA Scorecard for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (2014 Scorecard) requires the Enterprises to identify the key components, features, and standards needed for a Single Security. The Scorecard also requires work underway on the CSP to include the development of the operational and system capabilities necessary for the Enterprises to issue a Single Security through the CSP.