The Federal Housing Finance Agency provided more details Friday about key features for the new single security that will be issued by Fannie Mae and Freddie Mac.
The security will essentially be the same as the current mortgage-backed securities guaranteed by Fannie. The FHFA, which regulates Fannie and Freddie, reiterated that the move to a new security will be a "multi-year" effort because of the sheer size of the $4.2 trillion MBS market.
The goal of the initiative is partly to help transition to a new housing finance system, progress on which has been stalled in Congress.
"Our objective is to continue to make progress on building a new securitization infrastructure for Fannie Mae and Freddie Mac that is adaptable for use by other secondary market participants in the future," said FHFA Director Mel Watt in a press release.
A key reason for the single security is to end the pricing disparity between the two government-sponsored enterprises. Currently, Freddie securities trade at a discount to Fannie securities, which forces Freddie to charge a lower guarantee fee than Fannie to compensate investors.
The agency released a 60-page report on the structure of the single security that listed additional benefits including potentially reducing mortgage rates for borrowers, ostensibly by eliminating Freddie Mac's subsidized guarantee fees. The report also said the new single security would "establish the groundwork for the future housing finance system by making it easier for new entrants."
The proposed features for the single security did not differ much from the agency's August request for input, which received 23 letters in response.
The common security features include a payment delay of 55 days, certain pooling prefixes, mortgage coupon pooling requirements, minimum pool submission amounts, and general loan requirements such as first lien position, good title and non-delinquent status.
FHFA officials said Fannie and Freddie will issue and guarantee first-level single securities backed by mortgage loans that they have acquired. They will not cross-guarantee each other's first-level securities. In addition, the Federal Home Loan Banks will not be eligible issuers.
First-level single securities will finance fixed-rate mortgage loans now eligible for financing through the "to-be-announced," also known as TBA, market. Lenders will continue to be able to contribute mortgage loans to multiple-lender pools.
Both Fannie and Freddie will be able to issue re-securitizations. The FHFA report provides an analysis of the counterparty risk exposure to investors under the current securitization programs and the single security. It also provides further details about loan and security-level disclosures, and an alignment of policies and practices.
Freddie will offer investors the option to exchange legacy participation certificates for comparable single securities backed by the same mortgage loans and will compensate investors for the cost of the change in the payment delay.
The FHFA said it is still seeking input from various stakeholders and investors on the new security.