The Single Security Initiative. You may be unfamiliar with it, but if your credit union sells mortgage pools to the agencies for securitization and/or invests in the agencies’ mortgage-backed securities (MBS), you will see its results.
The Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac), under the oversight of the Federal Home Financing Authority (FHFA), undertook the Single Security Initiative with the goal of combining their separate new issue MBS markets into one huge, more liquid market. Reaching that goal requires each agency to issue MBS with identical features. Enter the Uniform Mortgage-Backed Security (UMBS™), debuting in June 2019.
In October 2013, following the FHFA’s directive to create a single security, Fannie and Freddie formed a joint venture, Common Securitization Solutions, LLC (CSS), to build the software platform that would ultimately produce the UMBS. The resulting Common Securitization Platform (CSP) will handle core back office functions and most of the securitization process for mortgage pools currently being securitized by each agency on their own. CSS and the CSP will also be able to produce UMBS for other entities in the future, if needed.
How will the transition to UMBS impact MBS investors?
If your credit union invests in agency MBS, the switch to UMBS should be easy, as the new securities will be based on the characteristics of current Fannie Mae MBS. The significant change will be in Freddie Mac-issued securities, as the 45-day delay period for payment of principal and interest switches to 55 days. As part of the transition, holders of current Freddie Mac MBS will be able to exchange them for essentially identical UMBS; only the payment delay period and CUSIP will change. The replacement UMBS will have the same underlying collateral, unpaid principal balance, weighted-average coupon, etc.
Investors choosing to exchange their holdings will be compensated for the 10-day increase in the payment delay. Freddie received accounting treatment guidance from the SEC that such an exchange will be considered a “minor modification.” While investors are not required to make the exchange, they should consider the implications of not doing so. If Freddie Mac should close the exchange option and only a small number of pre-UMBS bonds remain in the market, their price could be depressed. The biggest challenge for investors may be making changes in their investment policies to reflect the change from MBS to UMBS. Holders of Fannie Mae MBS will not have an exchange option, as characteristics will remain the same.
What does it mean for institutions selling mortgage loan pools to the agencies?
Again, the transition should be relatively painless. Sellers will continue to interact directly with the agency of their choice. Those working with Freddie Mac will see more impact as Freddie moves to align itself with the new product, including the addition of 10-year mortgages. While the UMBS will have some new disclosure elements for Freddie Mac securities, most of the changes have been in place since August 2017. Freddie will be updating contracts to reflect the change to the 55-day payment schedule. Data formatting will change some, and sellers will see some changes to the screens of Freddie Mac’s online Loan Selling Advisor program.
In preparation for this transition, Freddie Mac offers many resources on their website. A quick note regarding terminology: While credit unions commonly refer to Fannie and Freddie as "agencies," materials from Fannie, Freddie and the FHFA refer to them as "Enterprise” or “Enterprises,” as both are officially a Government Sponsored Enterprise, not a true agency of the federal government. Catalyst Corporate’s Brokerage Service can also assist credit unions with additional information regarding UMBS.
Upcoming dates of interest:
- April 19, 2019 – Forward pricing for Freddie Mac UMBS becomes available
- May 4, 2019 – MultiLender 55-day contracts for UMBS open for June delivery
- June 3, 2019 – UMBS goes live