The Long-Term Impact of the Uniform Mortgage-Backed Security

Earlier this year, Fannie Mae and Freddie Mac along with the Federal Housing Finance Agency (FHFA) issued the first uniform mortgage-backed security (UMBS), a new security backed by mortgages guaranteed by either Fannie Mae or Freddie Mac. In a post by the Urban Institute’s Karan Kaul and Laurie Goodman, Urban explores how the UMBS will benefit the housing finance system.

According to Urban, the single uniform security saves taxpayers money. The Urban Institute notes that MBS investors strongly preferred Fannie’s security, making it more liquid and more valuable than Freddie’s security. When selling securities into the market, lenders received a better price for Fannie’s securities, even when the loans underlying both securities had identical attributes.

Additionally, the UMBS reduces inefficiencies, with the securities of either GSE now able to be delivered into a single security, doing away with the compensation for the difference to lenders in sales.

The Urban Institute also notes that the UMBS “paves the way” for future housing finance reform, as not only a step forward for a single guarantor, but for multiple guarantors as well.

The UMBS requires not only consistency across securitization practices but also substantial alignment with the credit underwriting, servicing, and loss mitigation policies that collectively determine how loans perform and prepay.

“By reducing the significant competitive advantage that Fannie enjoyed over Freddie, it also helps open the way to additional competitors over time,” said Kaul and Goodman. “It is still difficult to imagine how a new entrant would overcome the legacy players’ enormous liquidity advantage, but moving to a single security helps ease that barrier.”

“In sum, the UMBS requires substantial alignment among business policies and systems regardless of the number of guarantors.”

The Urban Institute calls the creation of the UMBS an important step forward in the current system. It not only removes an expensive inefficiency in the current system, but it also lays the groundwork for deeper structural reforms in the years to come.