The Federal Housing Finance Agency (FHFA) has announced the deemed-issuance ratio for the 2023 calendar year in accordance with Internal Revenue Service (IRS) guidelines on the trading of the Uniform Mortgage-Backed Security (UMBS). The deemed-issuance-ratio will be utilized for diversification reporting on the bonds delivered to the purchaser until the bonds have been disposed of, regardless of the issuing government-sponsored enterprise (GSE) on the underlying bonds.
The FHFA announces this ratio annually at least three weeks prior to the affected calendar year.
The IRS Revenue Procedure 2018-54 provides that the ratio may be rounded as long as the rounded ratio is further from 50/50 than the actual observed data. Therefore, the deemed-issuance ratio for the 2023 calendar year is 53% Fannie Mae and 47% Freddie Mac.
The IRS procedure provides guidance on Section 817(h) of the Internal Revenue Code diversification requirements for variable annuity, endowment, and life insurance contracts. The IRS has provided a deemed-issuance-ratio to allocate issuer exposure for TBA trades between the Enterprises. Compliance with these requirements is impacted by the implementation of and trading in UMBS.
Revenue Procedure 2018-54 calls for FHFA to determine a deemed-issuance ratio for each calendar year based on the ratio of TBA-eligible securities issued by Fannie Mae and Freddie Mac during the 24-month period ending October 31 of the preceding year.
Revenue Procedure 2018-54 provides guidance and procedural rules for taxpayers that hold investments in one or more segregated asset accounts on which variable contracts are based. The guidance and rules allow these taxpayers to elect to treat certain mortgage-backed securities as having deemed issuers for purposes of the diversification requirements of Section 817(h) of the IRS.