The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the Enterprises), under the direction of the Federal Housing Finance Agency (FHFA), the Enterprises’ regulator and conservator, to develop a common mortgage-backed security (MBS) structure and combined TBA market. The resulting securities are used by the Enterprises to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. The 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac (2014 Conservatorship Strategic Plan) included the goal of developing a common MBS. The combined TBA market, along with the completed Common Securitization Platform (CSP), support FHFA’s statutory obligation to ensure that the Enterprises’ operations and activities foster liquidity in the nation’s housing finance markets. The combined market should also reduce or eliminate Freddie Mac’s current program of subsidizing the cost of securitizing single-family mortgage loans to make up for the trading disparity with Fannie Mae’s securities, the cost of which is being borne by taxpayers.
First-level securities (Uniform Mortgage-Backed Securities, or UMBSTM) are single-class securities backed by fixed-rate mortgage loans purchased by either Freddie Mac or Fannie Mae. There is no commingling of collateral in UMBS. Similar to today’s Fannie Mae Megas and Freddie Mac Giants, second-level securities (SupersTM) are single-class securities collateralized by other single-class securities. Supers securities allow for the commingling of Freddie Mac and Fannie Mae UMBS as well as other Supers.
The features and characteristics of the UMBS are based generally on Fannie Mae MBS characteristics and, as such, Fannie Mae MBS are fungible as of June 3, 2019. In essence, Fannie Mae MBS “became” the new security and Freddie Mac made changes to its security structure to more closely match Fannie Mae’s security, resulting in a common UMBS.
Freddie Mac offers investors the option to exchange legacy TBA-eligible Freddie Mac Gold PCs for comparable UMBS backed by the same mortgage loans.
As with other Enterprise securities, the guarantor is the issuing Enterprise.
The guarantor could be the same, or it could be different. For each, the guarantor is always the issuing Enterprise. Fannie Mae and Freddie Mac each issue their own UMBS. At the second level – Supers – collateral may be mixed Fannie Mae and Freddie Mac UMBS and/or Supers, or a single issuer’s securities. In either case, the Supers security could be issued by either Fannie Mae or Freddie Mac, regardless of whether their own collateral is contained in the security. See the example on page 1 of Appendix B of the Update on the Structure of the Single Security for information related to counterparty risk.
Commingling is allowed in second-level but not in first-level TBA-eligible securities. In either context, the guarantor is the issuing Enterprise. For example, an investor who owns a first-level security issued by one Enterprise can re-securitize it through the second Enterprise by paying any applicable fee. The timely payment of principal and interest on the resulting second-level security will be guaranteed by the second Enterprise, and that guarantee will be supported by the first Enterprise’s guarantee to the trust of the second-level security of timely payment of principal and interest on the first-level security.
Yes, the Enterprises expect that investors, dealers, vendors, and others need to update contracts, marketing materials, investment documents, systems, and procedures to reflect the new names of TBA-eligible mortgage-backed securities.
FHFA has established the Single Security Governance Committee (SSGC) composed of senior FHFA executives to assess new or revised Enterprise programs, policies, and practices for their effect on the cash flows of MBS eligible for financing through the TBA market. FHFA also performs ongoing monitoring of loan acquisitions, security issuances, and prepayments and ensures that the Enterprises continue to provide information on a timely basis to facilitate these ongoing assessments.
FHFA issued their final rule on Enterprise prepayment alignment in February 2019. The rule stipulates that the Enterprises maintain sufficient alignment to maintain differences of less than 2 percentage points in in the three-month CPR for a cohort, and less than 5 percentage points for the fastest paying quartile of a cohort. FHFA will apply the thresholds for alignment to all cohorts with combined outstanding UPB greater than $10 billion, monitoring for misalignment.
In addition to regular prepayment monitoring and quarterly publication of prepayment reports, FHFA also directed the Enterprises to reduce their WAC caps and servicing fees. Mortgage note rates within a pool must be at least 25bps above the security coupon and no greater than 112.5bps above the security coupon. Maximum servicing fees can be no more than 50bps, including the standard 25bps servicing fee
When prepayment differences exceed the stated ranges, FHFA will require that the cause of the divergence be reported to the SSGC. FHFA has potential remedies and penalties if prepayments are misaligned beyond the defined ranges.
The Enterprises remain separate entities with separately issued and guaranteed securities. Each Enterprise will continue to create its own trust agreements and disclosure documents, and must perform its own functions as issuer, master servicer, guarantor, and trustee in an independent manner. FHFA does not believe that complete alignment of the Enterprises, programs, policies or practices is necessary or appropriate.
CSP is a technology and operational platform that performs many of the core back office functions for UMBS and Supers, as well as most of the Enterprises’ current securitization functions (bond issuance, settlement, disclosure, bond administration and tax reporting) for single-family mortgages, on behalf of both Enterprises.
The CSP is necessary for the implementation of the Single Security Initiative. It enabled the Enterprises to implement one aligned new standard security in one common system rather than each Enterprise building to that standard in its own legacy systems. The CSP also makes administering commingled securities much more efficient because all the data from both Enterprises is on one platform.
Neither Enterprise’s current systems could execute commingled resecuritizations, which are critical to the success of the Single Security Initiative. Under FHFA’s direction, the CSP was undertaken as a joint initiative by the Enterprises to develop one common, flexible technological and operational platform to support the back-office activities related to single-family securitization. These activities involve storing, processing, and transmitting large volumes of data, so that investing in a single platform and carrying out the accompanying operational capabilities to support these functions will benefit both companies, and ultimately, taxpayers.
Common Securitization Solutions, LLC (also known as CSS) is a joint venture of Fannie Mae and Freddie Mac. CSS was charged with building and operating the new common securitization platform.
Per the FHFA Updates Progress on the Single Security Initiative and Common Securitization Program, the Single Security Initiative was implemented on June 3, 2019 when both Freddie Mac and Fannie Mae moved to the Common Securitization Platform. The Enterprises now have the ability to issue UMBS and Supers, including commingled resecuritizations, through the platform. CSP now acts as Fannie Mae’s and Freddie Mac’s agent for the issuance, bond administration, and disclosures for all newly issued UMBS and Supers.
No, as of May 31, 2019, Freddie Mac ceased issuance of new Gold PCs as of May 31, 2019. Freddie Mac will still permit creation of 45-day Gold Giant PCs containing existing legacy 45-day securities, as well as REMICs backed by 45-day Gold Giants and PCs.
Loan sales will continue to be conducted directly with the Enterprises. Sellers will not have any interaction with the CSP, and the Single Security Initiative will not affect how loans are sold and delivered to the Enterprises.
Freddie Mac did introduce a new 10-year loan product to match Fannie Mae, in preparation for the Single Security Initiative. Both Enterprises can issue the full complement of TBA-eligible securities: 30-year, 20- year, 15-year, and 10-year.
All servicer interactions continue to occur directly with the Enterprises. Servicers do not have any interaction with the CSP. As noted in the Single Security Update of May 2015, a few additional changes to the Enterprises’ loan removal policies have allowed for better alignment of UMBS issued by Fannie Mae and Freddie Mac.
Yes, lenders continue to have the option of issuing single-issuer pools or contributing to the Fannie Mae Majors or Freddie Mac MultiLender pools.
Yes, the CSP follows MISMO standards.
No. Seller/Servicers continue to interface with the Enterprises’ front-end systems to retrieve data.
Freddie Mac made some minor changes to its selling system to include the new disclosure, new 55-day products, changes to pooling requirements, and a cash execution path for 10-year mortgages to match Fannie Mae.
Both Enterprises follow guidance from FHFA on fees. There were no changes to Buy-ups/Buy-downs or G-Fees as a result of the Single Security implementation.
The UMBS and Supers follow the pooling terms of Fannie Mae’s MBS. The bond administration functions performed by the CSP do not change the pooling cycle. Because of the fungibility of the UMBS and Supers regardless of issuer, investors should be able to deliver UMBS and Supers issued by either Fannie Mae or Freddie Mac to satisfy their hedge positions.
Prior to the Single Security Go-Live on June 3, 2019, Freddie Mac used MAP to compensate Seller/Servicers in situations where it needed to make up for price disparities between Freddie Mac Gold PCs and Fannie Mae MBS. We expect that the Single Security Initiative will eliminate the need for MAP payments by either Enterprise, because we will be focused on UMBS performance alignment across both Enterprises.
Minor changes have been made by Freddie Mac to its Seller/Servicer Guide to align with the features of Fannie Mae MBS. These revisions included the investor payment cycle (55-day delay), prefixes, pooling parameters, pool numbers, the addition of the 10-year cash product, and the timing of delinquency disclosures. Fannie Mae did not make any changes to its Seller/Servicer Guide in response to the Single Security Initiative.
There are no changes to the pool submission process as the result of the CSP or Single Security Initiative. The lender must allow sufficient processing time between the time it submits its loan delivery data and the document submission package and the time it wants the securities to be issued in book-entry form.
There are two main changes to be aware of:
First, new 10-year and 15-year securities now have an 85-month minimum loan maturity term.
Second, in both Enterprises’ fixed-rate products:
Sellers participating in these programs should also be aware of changes to prefix and pool numbers.
Investors will receive their payment on the 25th day of the month or, if the 25th day is not a business day, on the next business day. As with previous practice, payment is remitted by the issuing Enterprise through its paying agent, the Federal Reserve Bank of New York.
Both Fannie Mae and Freddie Mac use the previous Agency and Product code for Fannie Mae (“01F”) to represent good delivery for either Fannie Mae- or Freddie Mac-backed 55-day securities. Market participants can allocate into 01F any of the following securities: existing TBA-eligible Fannie Mae MBS, exchanged Freddie Mac UMBS and Supers, or UMBS and Supers issued by either Enterprise and created after the Single Security Initiative implementation date.
No change in the re-securitization process is expected. However, the Enterprises may commingle collateral in a re-securitization. For example:
Supers can be backed by any combination of the following:
REMICS can be backed by any combination of the following:
Yes, 45-day and 55-day collateral can be combined in a 55-day REMIC group. However, all security payments will be made on a 55-day payment schedule.
Yes. Freddie Mac will continue to allow 45-day PC and REMIC collateral to be contributed to 45-day REMIC groups. Freddie Mac will also continue to form and issue new 45-day Giants backed by legacy 45-day PC collateral.
There is no extra charge for commingled resecuritizations over and above regular resecuritization fees based on FHFA’s guidance. Regular resecuritization fees are priced in a manner that is consistent with previous pricing.
Freddie Mac will continue to offer 45-day Giants backed by legacy 45-day collateral. Investors who are unable to do exchanges or who need to administer their portfolios more precisely may still require 45-day Giants. The Enterprises expect most of the market interest will be in the new UMBS and Supers.
No, the processing times remain the same as they were previously.
Market participants should check with their regulators and compliance departments to make sure they have made all appropriate updates to support the new UMBS TBA market.
Yes, the issuer will be disclosed. The issuer of the Single Security will generally be available 48 hours ahead of taking delivery of the security, also known as “48-hour day.”
Yes, in general the new disclosures apply to the first-level (L1) and second-level (L2) securities.
The file format for at-issuance and on-going disclosures is identical, with the data reflecting the appropriate reporting period. The data that is disclosed can be viewed in the joint Single Security Single-Class Disclosure Specifications as published in the revised version of November 2016. Within this document, attributes that are only applicable for at-issuance versus on-going are clearly indicated.
Both Enterprises publish at-issuance files three times each business day for first-level and second-level securities.
Both Enterprises publish monthly files on the fourth business day of each month at 4:30 P.M. for all securities.
Market participants can access disclosures via the Enterprises’ websites as well as the websites of third-party data vendors.
The Enterprises continue to provide all securities disclosures on their websites, including uniform disclosures for UMBS and Supers.
For the Single Security Initiative, the disclosures are generated from a single database at CSS to populate the two Enterprise sites which ensures synchronization of the file layouts. An investor has recourse only to the Enterprise that issued the UMBS and Supers the investor owns; the investor should refer to the website of the issuer for the relevant documents and data.
The disclosures are available in a flat file format.
Fannie Mae does not provide the new disclosure elements on Fannie Mae previously-issued securities. For newly-issued UMBS and Supers, Fannie Mae provides the respective UMBS/Supers disclosure elements.
Freddie Mac began providing updated monthly disclosures for all Freddie Mac securities outstanding (i.e., not paid-off) as of August 28, 2017. Historical data that was not previously collected from Seller/Servicers may not be available for previously-issued securities.
In determining the approach to disclosure, the goal was to balance investor needs against borrower privacy concerns. Therefore, certain loan-level attributes were masked or removed and the Enterprises aligned available disclosure elements.
Please refer to the Enterprises’ relevant joint technical specifications for detailed tables containing the disclosure release schedules.
Data vendors, dealers, investors, and securities market participants will want to understand the disclosure file format for UMBS and Supers. For some, this may mean making changes to their systems, software, or processes to support the market transition to the new securities.