Change Is Coming to the TBA Market

By Lisa Tibbitts

Freddie Mac and Fannie Mae will begin to issue a common mortgage-backed security through the Common Securitization Platform in the second quarter of 2019. Investors, dealers, vendors, and seller/servicers must get prepared in early 2019 for this combined $3.5 trillion market of to-be-announced RMBS. Forward trading will begin well ahead of the go-live date.

Second only to U.S. Treasuries in trading volume, the TBA market is the most liquid and, consequently, the most important secondary market for mortgage loans, according to the Securities Industry and Financial Markets Association. “There are interdependencies among all participants. It’s crucial that each organization synchronizes its preparations so the entire market can continue operating smoothly,” says Mark D. Hanson, SVP for securitization at Freddie Mac.

The Single Security Initiative will create a new type of security known as uniform mortgage-backed securities that can be issued and guaranteed by either Freddie Mac or Fannie Mae. Single-class resecuritizations of UMBS will be called Supers. The goal is to strengthen the U.S. mortgage market by supporting TBA liquidity which, in turn, should maintain or maybe even lower the cost of housing finance. Ultimately, the common UMBS structure may benefit borrowers, taxpayers, investors and seller/servicers.

Assessing the impact

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For market participants, getting prepared for the Single Security Initiative may involve many departments and processes as well as possible changes to complex IT systems, exchange activities and investment guidelines. Tax, accounting, legal and regulatory issues will also need to be addressed.

In preparing for the launch of the Single Security Initiative, market participants may find the following steps helpful:

  • Assess the impact to your organization; one tool to facilitate that process may be the Market Adoption Playbook.
  • Coordinate across departments to identify the internal and external resources required, then develop your go-forward plan.
  • If you rely on any third-party vendors, you’ll need to account for their development, testing, and implementation timelines in your readiness plan.
  • Determine funding needs.
  • If possible, designate internal stakeholders to stay up-to-date on project developments.

“Merging two markets into one is going to impact the entire TBA ecosystem. That is why it is so important that we are all jointly working toward readiness,” explains Rick Sorkin, SVP for securitization at Fannie Mae. “The Market Adoption Playbook can help each organization with its preparations.”

Investor readiness

Investors may have the most complicated readiness scenario because the Single Security Initiative impacts a wide range of systems and processes. Changes may call for updated documentation as well as staff training.

“Questions about documents and policies related to portfolio concentration limits, investment guidelines, offering documents, hedging strategies, and other issues need to be addressed,” adds Sorkin, “so all financial institutions can continue to handle UMBS trades seamlessly.”

Dealer implications

There are approximately $1.4 trillion of Freddie Mac 45-day Gold participation certificates outstanding, of which an estimated $1.1 trillion are eligible to be exchangeable for 55-day UMBS once the new security is officially launched.

Dealers should work with their customers to schedule and settle exchanges on the customers’ behalf, including distributing the 10 days of payment delay compensation provided by Freddie Mac. Dealers also have to be ready to manage forward trading and dollar rolls surrounding Single Security Initiative implementation.

Vendor changes

Changes to vendors’ systems could be extensive. They’ll have to address issues such as:

  • Prefix and pool number content and structure
  • System labels and logic for exchanges
  • Disclosure file formats and timing
  • Analytics and reports
  • Display and reporting for the UMBS

As with any significant updates, companies will then have to communicate the nature and timing of system changes to their customers while building in enough time for customer testing. They may want to consider customer support options for the go-live date as well.

Fewer changes for seller/servicers

The Single Security Initiative will not affect how loans are sold and delivered; sellers will continue to conduct business directly with Freddie Mac and Fannie Mae. Also, each government-sponsored enterprise will maintain its own servicing and selling guides.

Because the features of the UMBS will mimic Fannie Mae MBS, there will be no changes for Fannie Mae seller/servicers. Freddie Mac will make some minor changes to its selling system, including new disclosures, new 55-day products, changes to pooling requirements, and a cash execution path for 10-year mortgages to match Fannie Mae’s MBS.

“From the beginning, one of our goals has been to minimize effects on seller/servicers,” Hanson notes. “Sellers will receive advance notice of these changes so they have plenty of time to update their systems.”

In late 2018, both Freddie Mac and Fannie Mae will make testing resources, assistance, and validation resources available. “Ultimately, we want to work with all market participants to develop a Single Security that preserves TBA eligibility and aligns with SIFMA’s good delivery guidelines,” Sorkin says.

Lisa Tibbitts is director of public relations at Freddie Mac.

What Is the Single Security Initiative?

Since 2014, Freddie Mac and Fannie Mae have been working together—along with their joint venture, Common Securitization Solutions, LLC—under the direction of the Federal Housing Finance Agency to create a common fungible security that will be issued and guaranteed by either of the GSEs.

The new uniform mortgage-backed securities will have the same features and disclosures whether the issuer and guarantor are Fannie Mae or Freddie Mac. UMBS will be backed by fixed-rate 30‐year, 20‐year, 15‐year and 10‐year mortgages.

The common features of the Single Security will largely align with Fannie Mae’s current MBS. Freddie Mac has already adopted the common disclosure framework for its PCs.

To expand market liquidity for holders of its 45‐day PCs, Freddie Mac will allow investors the option to exchange 45-day PCs for 55‐day securities backed by the same single‐family mortgage loans. The Freddie PC exchange will be available in 2019—about a month before the Single Security implementation date—and will remain open for the foreseeable future.

Because the UMBS mimics all the features of the current Fannie Mae MBS, there is no requirement or need for Fannie Mae MBS holders to participate in the exchange.