In June 2019, Fannie Mae and Freddie Mac launched the marked the completion of their Single Security Initiative with the launch of the Uniform Mortgage-Backed Security (UMBS), “the result of close collaboration with FHFA, Freddie Mac, Common Securitization Solutions, and hundreds of housing finance stakeholders and we congratulate all involved on this achievement,” said Renee Schultz, SVP, Capital Markets, Fannie Mae in a statement.
The UMBS will require alignment between the GSE’s pools in order to work properly, and to address this, the Federal Housing Finance Agency (FHFA) released a request for input on a proposal to further align Fannie and Freddie’s pooling practices.
In a report authored in part by former FHFA Special Advisor Bob Ryan, the Urban Institute assessed the FHFA’s proposal and how the Agency can “iron out the wrinkles” of a single security. reviewing the purpose of the UMBS and the challenges that policymakers have faced in pulling it off and offering thoughts on how the FHFA might use a more market-oriented approach to address the challenges more effectively,
According to Urban’s report, UMBS's impact on the to-be-announced (TBA) market will be key to the security’s success.
“Ideally, by combining Fannie and Freddie’s securities, the UMBS will expand the TBA market’s liquidity, thereby improving pricing marketwide,” Urban’s report stated. “But that will happen only if the combined securities are fungible. A material divergence in the performance of Fannie and Freddie’s pools will lead investors to trade more and more in the specified and stipulated pool markets, reducing liquidity in the TBA market and thereby undermining pricing marketwide.”
The FHFA, Urban notes, should be focusing on the rise of specified pools, as this could drive a loss of TBA liquidity. However, it needs to “dig deeper” to what is causing the rise of specified pools.
For example, if a lender is faster than others, it may be required to explain why to Fannie and Freddie, and be able to show that they are simply providing borrowers with a beneficial refinance option more quickly than the rest of the market.
Urban’s proposed practices would require the FHFA to utilize a bottom-up market-oriented approach, rather than a top-down regulatory approach.
Find Urban’s complete report here.