FHFA rule requires Fannie and Freddie to align cash flows on MBS

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WASHINGTON — The Federal Housing Finance Agency issued a final rule Thursday requiring Fannie Mae and Freddie Mac to align their cash-flow policies on current mortgage-backed securities, and eventually for a uniform security when it is implemented in June.

The agency called the final rule a “major step forward,” codifying requirements that have already existed with the government-sponsored enterprises in conservatorship. The agency said the rule is essential for a seamless adoption of the "uniform mortgage-backed security" through a common securitization platform starting June 3.

The FHFA has said combining the two securities operated by the government-sponsored enterprises will increase liquidity and encourage market participation, which will ultimately benefit market participants and homeowners.

“This rule demonstrates FHFA's commitment to the success of the UMBS, which will promote liquidity and efficiency in the secondary mortgage market," Joseph Otting, the FHFA's acting director, said in a statement.

The final rule takes into account feedback the agency received from its notice of proposed rulemaking. The regulation incorporates adjustments meant to ensure the GSEs maintain consistent cash flows, and warns the GSEs of consequences if their cash-flow policies fall out of alignment with each other.

The FHFA is also requiring the GSEs to lower the maximum mortgage note rate to qualify for a mortgage-backed security.

Investors have traditionally viewed Fannie and Freddie securities differently because of variations in their payment schedules, prepayment speeds and liquidity, according to an Urban Institute report from August.

The FHFA also addressed comments from several groups, including the National Association of Home Builders and the Securities Industry and Financial Markets Association, requesting more transparency and suggesting an avenue to review ongoing prepayment behavior for the uniform MBS. The agency appeared open to such changes in the future.

“FHFA understands the interest in transparency underlying these comments,” the agency said in the final rule. “FHFA currently is considering options to improve and maintain transparency with market participants, but does not believe that the final rule is the proper vehicle to institute a committee structure or establish a fixed list of participants.”

The final rule will go into effect 60 days after the rule is published in the Federal Register.

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MBS Securitization Housing finance reform GSEs Joseph Otting FHFA Fannie Mae Freddie Mac