GSE securities merge as UMBS launches

Monday marks the day that mortgage-backed securities from Fannie Mae and Freddie Mac will begin to be issued under a single, unified securities program in a milestone move that aims to increase liquidity and lower housing costs.

“The mortgage world has changed today,” said Robert Fishman, deputy director of the Federal Housing Finance Agency (FHFA), during a conference call touting the launch of the new program, dubbed the Uniform Mortgage-Backed Security (UMBS). Combining the two markets into one will benefit taxpayers and the housing system “by addressing structural issues and trading disparities,” Fishman said.

Prior to the UMBS launch, the government-sponsored enterprises (GSEs) issued mortgage-backed securities separately. And with Fannie’s securities program far more liquid than Freddie’s, there was a large disparity between the trade volumes of the two GSEs. Bloomberg reported that Fannie has accounted for more than 80 percent of trading volume in 15- and 30-year mortgage pools since mid-2011.

Coupling the programs together simplifies the system in the hopes of making Freddie’s securities just as liquid as Fannie’s. The previous gulf in liquidity, per the FHFA, placed substantial annual costs on Freddie Mac — and ultimately, the FHFA said, on taxpayers — because it hindered Freddie’s access to funds it could use to pay dividends to the U.S. Department of the Treasury.

The lack of liquidity in Freddie’s bonds resulted not only in an inequality in market share but also in price, since Fannie’s liquid bonds have been traditionally attractive to investors. The move to the UMBS, however, means Fannie and Freddie securities will now trade at a single consistent value.

Getting to this point has taken significant preparation. The GSEs formed a joint company, Common Securitization Solutions, in 2014 to develop a securitization platform under the FHFA’s direction. The single mortgage-backed security was originally slated to be issued last year, but the rollout was pushed back to this year to ensure a smooth transition.

Freddie, in particular, will have to make some changes to facilitate the shift to the UMBS. Previously, Freddie’s products had a 45-day delay in moving homeowners’ mortgage payments to investors, compared to 55 days for Fannie. Now, the FHFA is requiring Freddie to align its timeline to Fannie’s, to further equalize the products in the eyes of investors. The GSEs also are working to synchronize the prepayment speeds for the mortgages underlying their securities, since prepayment speed is a key factor that mortgage traders evaluate when investing.

All of these changes are expected to increase the volume of daily securities trading. More investments means lower yields, since investors are generally willing to accept lower returns on bonds that are easier to move. These lower yields, however, should translate into lower interest rates, with savings being passed to homebuyers.

“Americans will benefit from the efficiency and standardization brought about by this new common security,” said Mark Hanson, Freddie Mac’s senior vice president of securitization. He called the UMBS “one of the most significant accomplishments in our decade-long effort to improve the U.S. housing-finance system.”

“Today’s launch of UMBS is a major milestone that marks the successful implementation of the Single Security Initiative,” echoed Renee Schultz, Fannie Mae’s senior vice president of capital markets.

“We remain focused on ensuring that all market participants continue to make a smooth transition to UMBS and maintaining a highly liquid housing-finance market.”


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