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FHFA’s Final Rule on Uniform Mortgage-Backed Security

As part of its goal to significantly improve the predictability of cash flows to MBS investors, the Federal Housing Finance Agency [1] (FHFA) has issued a final rule that requires Fannie Mae and Freddie Mac (the Enterprises) to align programs, policies, and practices that affect the cash flows of “To-Be-Announced" (TBA)-eligible Mortgage-Backed Securities (MBS).

The agency statement [2]indicated that this is a major step forward. “This rule demonstrates FHFA's commitment to the success of the UMBS, which will promote liquidity and efficiency in the secondary mortgage market," said Joseph Otting, FHFA Acting Director.

FHFA’s final rule [3] addresses feedback expressed by commenters on the Notice of Proposed Rulemaking by refining alignment requirements to assure market participants that the GSEs will maintain consistent cash flows. The rule also explicitly outlines the ramifications to the Enterprises of misalignment. The announcement also stated that 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. It indicated that the requirements apply to the GSE’s current offerings of TBA-eligible MBS and to the new Uniform Mortgage-Backed Security (UMBS).

As reported in DS News [4]earlier, the GSEs will begin issuing the UMBS beginning June 3, 2019. Formulating the common securities are aimed at replacing the Enterprises’ current offerings of TBA-eligible MBS, which will be issued through the Enterprises' joint venture, Common Securitization Solutions (CSS), using the Common Securitization Platform (CSP). The FHFA statement issued in March explained that after the June 2019 launch, “CSP and CSS “will expand to include the administration of multi-class securities and commingled Enterprise UMBS and the production of UMBS disclosures.” CSS and CSP will thereafter begin performing bond administration functions for close to 900,000 securities backed by nearly 26 million loans.

Followed by this, the agency in September 2018 announced [5] that it is issuing a proposed rule to require Fannie Mae and Freddie Mac to align programs, policies, and practices that affect the prepayment rates of TBA-eligible mortgage-backed securities. According to the FHFA, the purpose of the proposed rule is to enhance the overall liquidity of GSETBA-eligible MBS without regard to which GSE is the issuer. Specifically, the rule is designed for maintaining and improving the efficiency and liquidity of the secondary mortgage market.