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Perspectives
August 22, 2016

The Single Security: Testing the Pipes

Mark Hanson
By
Mark Hanson, SVP Securitization

Before this year ends, a new chapter in the way capital supports homeownership in this country will begin. If all goes as planned, Freddie Mac will be the first company to issue fixed-rate mortgage-backed securities through the Common Securitization Platform (CSP). We also plan to move all existing fixed-rate Freddie Mac Participation Certificates (PCs) to the CSP, which will support their administration as well as new issuances.

These two milestones will show that the CSP is operational and signal an important step toward the ability to create a single fungible security guaranteed either by Freddie Mac or Fannie Mae for trade in the To Be Announced (TBA) market. This is a goal we have been working toward with Fannie Mae under the direction of the Federal Housing Finance Agency (FHFA) since 2012.

The single security has been dubbed the Uniform Mortgage-Backed Security (UMBS), while commingled resecuritizations of UMBS, which can combine UMBS issued by Freddie Mac or Fannie Mae, will be called Supers. (Supers are the single security counterpart to Freddie Mac's Giant PCs.)

There are approximately $1.5 trillion in Freddie Mac 45-day PCs, of which an estimated $1.2 trillion are convertible by PC holders into 55-day UMBS once the new security is officially launched in 2018.

UMBS and Supers have the potential to transform the separate multi-trillion dollar TBA markets for Freddie Mac and Fannie Mae mortgage securities into a single $4+ trillion market, second in size only to the global market for U.S. Treasuries.

Due to the TBA market’s size and complexity, we had to do a lot of work behind the scenes to make this happen. The accompanying timetable published in July’s FHFA Single Security update shows the enormous amount of progress that has been made and how much remains to be done.

SUMMARY OF MILESTONES FOR RELEASE 1 AND RELEASE 2

Which brings us back to the significance of our upcoming Freddie Mac security issuance administered through the CSP, which accomplishes two goals. First, it will provide tangible proof that the platform works. Second, it will end the development phase of the FHFA Single Security update called Release 1.

During Release 1, we completed joint system-to-system testing to ensure the functionality of the CSP platform’s modules for data acceptance, issuance support, bond administration for fixed-rate bonds and other critical functions related to Freddie Mac PCs and Giant PC issuance.

On schedule for 2017 is Release 2, when both Freddie Mac and Fannie Mae will undertake additional testing of the CSP modules for issuing and administering our respective single- and multi-class mortgage-backed securities. Fannie will be moving both fixed-rate and ARM securities to the platform, which is the largest dimension of Release 2. Both companies will be testing the ability of the platform to support commingled resecuritizations with the goal of achieving operational readiness by 2018 – the target go-live date for the Single Security.

At the same time, Freddie Mac and Fannie Mae continue to align their processes and disclosures as directed by FHFA in preparation for the single security. Most recently, Freddie Mac and Fannie Mae communicated the finalized features of the single security and jointly issued the single security disclosure specification, including field names and layouts and new exchange disclosure elements.

Freddie Mac recently announced plans to adopt the Single Security disclosure format, including all relevant fields, in the Freddie Mac Disclosure Guide by the summer of 2017. The new disclosure layout will be applied to our existing securities, facilitating consistency between current 45-day securities and new 55-day UMBS.

All of the progress we are making has the potential to bring about a housing finance system that poses less risk to taxpayers while also supporting a liquid, stable and affordable mortgage market under a variety of economic conditions. It may even represent the most far-reaching upgrade to the U.S. housing market in more than a generation.

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