The GSEs’ Uniform Mortgage-Backed Securities: Pros and Cons

As Fannie Mae and Freddie Mac prepare to launch a combined bond, questions arise about if the change will negatively or positively impact the mortgage market and affordability, Bloomberg reports. This change would “virtually eliminate the distinction between bonds issued by Fannie Mae and Freddie Mac, which guarantee nearly half of U.S. residential mortgages,” with the combined security intended to help improve market market liquidity and mitigate investor risk.

However, while some believe this change will lower mortgage rates, critics argue the opposite may happen. The combined security is set to launch on June 3, as the last step in a “more than five-year process to unify a roughly $4.4 trillion pile of agency MBS currently split between the two government-sponsored enterprises.”

“It already was the most liquid market in the world in many respects. What are they trying to fix, exactly?” Walt Schmidt, Head of Mortgage Strategies at FTN Financial in Chicago, told Bloomberg.

According to experts, the final outcome can’t be said until the combined bonds launch.

“To some extent June 3 will be a bit analogous to Y2K, you don’t know if everything will be successful until after the fact,” Jay Bacow, head of Morgan Stanley’s MBS research team, told Bloomberg. He added that “the mortgage market is second to Treasuries in terms of fixed-income liquidity and it’s challenging for us to see it losing that distinction under UMBS (Uniform Mortgage Backed Securities).”

In April, Freddie Mac announced that its Investor Reporting Change Initiative (IRCI) would revise single-family investor reporting requirements beginning in May 2019, including moving the investor reporting cycle from mid-month to end-of-month and updating remittance cycles.

The GSE states that it is making the changes to promote alignment and industry standards for the UMBS. In March, the Federal Housing Finance Agency (FHFA) issued a final rule that requires Fannie Mae and Freddie Mac to align programs, policies, and practices that affect the cash flows of “To-Be-Announced" (TBA)-eligible Mortgage-Backed Securities. The agency statement 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.