The Federal Housing Finance Agency (FHFA) announced on Wednesday 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 “To-Be-Announced" (TBA)-eligible mortgage-backed securities (MBS). According to the FHFA, the purpose of the proposed rule is to enhance the overall liquidity of GSE TBA-eligible MBS by supporting their fungibility (mutual interchangeability) 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.
The rule would apply to both the GSEs' current offerings of TBA-eligible MBS and to the new Uniform Mortgage-Backed Security (UMBS) which are being implemented in June 2019.
The FHFA notes that there have been some industry concerns that GSE UMBS may not be truly fungible because differences between Fannie Mae and Freddie Mac policies could result in materially differing cash flows. The proposed role is intended to foster competition between Fannie Mae and Freddie Mac by removing Fannie Mae’s liquidity and price advantage, forcing competition between Fannie Mae and Freddie Mac as they move to UMBS.
The FHFA plans on improving liquidity through the new rule by combining the Fannie Mae and Freddie Mac TBA-eligible MBS, combining the $2.3 trillion in estimated tradeable TBA-eligible MBS from Fannie Mae and $1.3 trillion from Freddie Mac.
Standardizing Fannie Mae and Freddie Mac that affect cash flows to investors in TBA-eligible MBS is intended to benefit market participants and homeowners in the same manner that market participants and homeowners benefit from the standardization that underlies TBA eligibility. According to the Federal Reserve bank of New York, this standardization “simplifies the analytical and risk management challenges for participants in agency MBS markets” and that “rather than attempting to value each individual security participants need only to analyze the more tractable set of risks associated with the parameters of each TBA contract.”
Find the notices from the FHFA here.