Testing of the common securitization platform is taking longer than expected, but the Federal Housing Finance Agency said it won't delay the 2019 launch of Fannie Mae and Freddie Mac's new single "uniform mortgage-backed security."
Meanwhile, the FHFA and government-sponsored enterprises are encouraging secondary market participants to begin their own preparations for the industrywide transition.
Common Securitization Solutions, the joint venture created by Fannie Mae and Freddie Mac to develop and operate the platform, is testing the data acceptance, issuance support, bond administration and disclosures modules with both Fannie Mae and Freddie Mac. But that testing is taking longer than expected and will now stretch into 2018, the FHFA said in a Dec. 4 update on the initiative.
For lenders, a combined platform and security could indirectly improve the prices their loans fetch on the secondary market. That's because, if all goes according to plan, the modernized platform and single security would attract more investors to the MBS market.
Earlier this year, the FHFA announced a revised timeline for the CSP, delaying full implementation until 2019 following "lessons learned" from the first phase.
The parties were previously expected to complete application development and the system-to-system testing by the end of 2017, according to the previous version of the FHFA's timeline, released in August.
"Despite the significant progress all parties are making, system-to-system testing requires additional time and will not be completed by the end of the year as previously expected," according to an update issued on Dec. 4 by the FHFA. "The focus of the remaining work is in several key areas, including the conversion of legacy multi-class securities onto the platform, disclosure reporting and tax reporting."
The system-to-system testing is now expected to be finished in the first quarter of 2018 and then the end-to-end testing phase will begin.
The completion of pre-parallel testing remains on schedule for 2018. There is no change to the schedule for 2019, when Fannie Mae, Freddie Mac and CSS implement the Single Security Initiative and issue the first uniform mortgage-backed securitization during the second quarter.
Freddie Mac transferred to the CSS the operational responsibilities for the issuance and settlement of its MBS in November 2016.
From November 2016 through the end of October, Freddie Mac has used the CSP for the issuance and settlement of approximately 1,000 new securities with an unpaid principal balance of $55 billion each month. It also transferred the monthly bond administration function for 260,000 securities backed by 9.8 million loans.
Besides the change to the timeline, the FHFA update includes an overview of the outreach efforts it's made with Fannie and Freddie to encourage industry participants to get ready for the UMBS, including a "Market Adoption Playbook" and online video that explains the Single Security Initiative:
"As implementation approaches, the Enterprises will accelerate and intensify their engagement with market participants about the Single Security Initiative," FHFA Director Mel Watt said in a press release. "I urge industry to take advantage of the resources available and to be ready for the transition."
But while the industry awaits completion and adoption of the CSP, the adoption of new credit scoring models by the GSEs is on hold.
While the GSEs are jointly developing the platform, it has been suggested the CSS entity could be sold off to private owners in the event Fannie and Freddie are wound down. But independent mortgage bankers are concerned that if Congress votes to privatize the CSP, it could give large banks too much control over the real estate finance market. And other industry observers have argued that an overhaul of the secondary market should be modeled after Ginnie Mae's platform.
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Corrected December 4, 2017 at 5:17PM: This story has been updated to clarify that the estimated volume of Freddie Mac's use of the CSP volume is monthly, not cumulative.