[Federal Register Volume 83, Number 180 (Monday, September 17, 2018)]
[Proposed Rules]
[Pages 46889-46895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20124]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1248

RIN 2590-AA94


Uniform Mortgage-Backed Security

AGENCY: Federal Housing Finance Agency.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or Agency) is 
providing notice and inviting comment on a proposed rule to improve the 
liquidity of the Federal National Mortgage Association (Fannie Mae) and 
the Federal Home Loan Mortgage Corporation (Freddie Mac) (the 
Enterprises) To-Be-Announced (TBA) eligible mortgage-backed securities 
(MBS) by requiring the Enterprises to maintain policies that promote 
aligned investor cash flows both on current TBA-eligible MBS, and, upon 
its implementation, on the Uniform Mortgage-Backed Security (UMBS)--a 
common, fungible MBS that will be eligible for trading in the TBA 
market for fixed-rate mortgage loans backed by 1-4 unit (single-family) 
properties.

DATES: Written comments must be received on or before November 16, 
2018.

ADDRESSES: You may submit your written comments on this proposed rule, 
identified by regulatory information number: RIN 2590-AA94 by any of 
the following methods:
     Agency website: www.fhfa.gov/open-for-comment-or-input.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by email 
to FHFA at [email protected] to ensure timely receipt by FHFA. 
Please include ``RIN 2590-AA94'' in the subject line of the message.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA94, 
Federal Housing Finance Agency, Constitution Center (OGC Eighth Floor), 
400 7th St. SW, Washington, DC 20219. Deliver the package to the 
Seventh Street entrance Guard Desk, First Floor, on business days 
between 9:00 a.m. and 5:00 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA94, Federal 
Housing Finance Agency, Constitution Center (OGC Eighth Floor), 400 7th 
St. SW, Washington, DC 20219. Please note that all mail sent to FHFA 
via U.S. Mail is routed through a national irradiation facility, a 
process that may delay delivery by approximately two weeks. For any 
time-sensitive correspondence, please plan accordingly.

FOR FURTHER INFORMATION CONTACT: Robert Fishman, Senior Associate 
Director, Division of Conservatorship, (202) 649-3527, 
[email protected], or James P. Jordan, Associate General Counsel, 
Office of General Counsel, (202) 649-3060, [email protected]. These 
are not toll-free numbers. The telephone number for the 
Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the proposed rule and will 
consider all comments before issuing a final rule. FHFA will post for 
public inspection all comments received by the deadline without change, 
including any personal information you provide, such as your name, 
address, email address, and telephone number on the FHFA website at 
http://www.fhfa.gov. In addition, copies of all comments received will 
be available for examination by the public through the electronic 
rulemaking docket for this proposed rule also located on the FHFA 
website.

II. Background

    On October 4, 2012, FHFA published and requested public input on a 
white paper entitled Building a New Infrastructure for the Secondary 
Mortgage Market.\1\ The white paper proposed a new securitization 
platform (the ``Common Securitization Platform'' or ``CSP''). The goal 
of the proposal was to improve housing finance while not limiting 
market choices or innovation. The proposal identified principles 
critical to the success of an efficient secondary mortgage market--
including promoting liquidity, attracting private capital, benefiting 
borrowers, and operating flexibly and efficiently. FHFA's proposal 
involved the standardization of functions that are common across the 
industry, such as the issuance and settlement of mortgage-backed 
securities (MBS) and their monthly bond administration.
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    \1\ https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/FHFA_Securitization_White_Paper_N508L.pdf (last 
accessed 08/17/2018).
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    In response to the white paper, FHFA received input from a broad 
cross-section of stakeholders in the securitization process. Generally, 
the respondents supported the technological aspects and the proposed 
functions of the CSP. In October 2013, Fannie Mae and Freddie Mac 
formally established a joint venture to develop the CSP, using as a 
legal vehicle a limited liability company--Common Securitization 
Solutions, LLC (CSS).
    On May 13, 2014, FHFA published its 2014 Strategic Plan for the 
Conservatorships of Fannie Mae and Freddie Mac (2014 Strategic Plan). 
The 2014 Strategic Plan Scorecard \2\ set a goal that the Enterprises, 
through CSS, develop a single, common Enterprise MBS as part of the 
broader CSP build. FHFA had determined that a single, common Enterprise 
MBS would promote liquidity and improve the distribution of investment 
capital. FHFA concluded that by making Freddie Mac MBS fungible with 
Fannie Mae MBS, both the Fannie Mae and Freddie Mac MBS markets would 
become more and equally liquid. Reports indicated that Freddie Mac was 
spending as much as $400 million dollars per annum in market adjusted 
pricing (MAP) \3\ and that Freddie Mac's MAP costs were attributable to 
its MBS being less liquid than Fannie Mae MBS.\4\ Those amounts have

[[Page 46890]]

subsequently declined, but could rise again depending on market 
conditions. Successful adoption of UMBS would eliminate Freddie Mac's 
MAP cost and facilitate more competitive pricing, which could then flow 
through to mortgage borrowers.
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    \2\ Post-conservatorship, FHFA began publishing Scorecards, 
which provide the implementation roadmap for the Strategic Plan for 
the Conservatorships of Fannie Mae and Freddie Mac. The Scorecards 
include specific objectives and timetables for the Enterprises in 
support of the Strategic Plan.
    \3\ MAP is a cash payment or discount in the contractual ongoing 
guarantee fee based on spreads between Fannie Mae and Freddie Mac 
MBS.
    \4\ See e.g., Laurie Goodman, Lewis Ranieri, Charting a Course 
to a Single Security (September 3, 2014) (https://www.urban.org/sites/default/files/publication/22916/413218-Charting-the-Course-to-a-Single-Security.PDF).
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    On August 12, 2014, FHFA published a request for input (2014 RFI) 
\5\ on the Single Security (now known as the ``Uniform Mortgage-Backed 
Security'' or ``UMBS'') and invited feedback on all aspects of the 
proposed UMBS structure and, in particular, requested input on the 
following questions: 1. What key factors regarding TBA eligibility \6\ 
status should be considered in the design of and transition to a Single 
Security? 2. What issues should be considered in seeking to ensure 
broad market liquidity for the legacy securities? 3. What operational, 
system, policy (e.g., investment guideline), or other effects on the 
industry should be considered? 4. What can be done to ensure a smooth 
implementation of a Single Security with minimal risk of market 
disruption?
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    \5\ https://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/RFI-Single-Security-FINAL-8-11-2014.pdf (last accessed 08/
17/2018).
    \6\ To-be-announced (TBA) eligible MBS are MBS that meet certain 
market criteria for fungibility, e.g., they have the same maturity, 
coupon, face value, price, and settlement date. The specific MBS 
delivered to fulfill a to-be-announced trade is not designated at 
the time the trade is made. Rather the seller promises to deliver, 
on an agreed upon date, an MBS that conforms to the agreed upon 
criteria. Typically, the specific MBS delivered to complete the 
trade are announced 48 hours prior to the settlement date. The 
ability to forward trade the TBA-eligible MBS allows lenders to 
offer mortgage borrowers ``rate locks,'' i.e., contract with 
borrowers to supply mortgage loans at a given rate, provided that 
the borrower settles the mortgage loan within a specified time 
period.
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    On October 7, 2014, under the auspices of FHFA, the Enterprises 
began engaging in joint discussions to define the parameters of a 
potential UMBS, including security features and disclosure 
requirements.
    On May 15, 2015, FHFA issued An Update on the Structure of the 
Single Security (May 2015 Update),\7\ which reported that respondents 
to the 2014 RFI were generally supportive of the UMBS. In answer to the 
2014 RFI questions outlined above, respondents identified, as key 
elements to UMBS success, general alignment on Enterprise policy and 
practices affecting prepayment speeds, implementation steps, and the 
fungibility of legacy securities and UMBS. Some respondents expressed 
concerns about the prospects for fungibility of legacy securities and 
UMBS, a potential decrease in the quality of cheapest-to-deliver 
collateral, the potential for an increase in stipulated trades that 
could detract from liquidity in the TBA market, and the costs of 
implementation.\8\
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    \7\ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Single%20Security%20Update%20final.pdf (last accessed 08/17/2018).
    \8\ The May 2015 Update provides a detailed analysis of the 
input received and the bases for FHFA's acceptance or rejection of 
recommendations beginning on p. 5. https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Single%20Security%20Update%20final.pdf (last 
accessed 08/17/2018).
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    After observation of the joint discussions between the Enterprises, 
careful review of the 24 letters in response to the 2014 RFI,\9\ and 
consideration of the respondents' recommended changes, FHFA as 
conservator determined that: (1) Each Enterprise would issue and 
guarantee first-level UMBS backed by mortgage loans that the Enterprise 
has acquired. The Enterprises would not cross-guarantee each other's 
first-level UMBS; (2) The key features of the new UMBS would be the 
same as those of the current Fannie Mae MBS, including a payment delay 
of 55 days; (3) UMBS would finance fixed-rate mortgage loans now 
eligible for financing through the TBA market; (4) Mortgage sellers 
would continue to be able to contribute mortgage loans to multiple-
lender pools; (5) Each Enterprise would be able to issue second-level 
re-securitizations or ``Supers'' backed by UMBS or other Supers issued 
by either Enterprise.\10\ In order for a legacy Freddie Mac Mortgage 
Participation Certificate (PC) to be re-securitized, the investor would 
have to first exchange the PC for a UMBS issued by Freddie Mac, so that 
the payment date of all of the securities in the collateral pool 
backing the re-securitization would be the same (see (8) below); (6) 
The loan- and security-level disclosures for UMBS would closely 
resemble those of Freddie Mac PCs; (7) Existing Enterprise policies and 
practices related to the removal of mortgage loans from securities 
(buyouts), which already were aligned substantially, would be generally 
similar and more closely aligned for purposes of the UMBS. FHFA and the 
Enterprises would carefully assess the potential effect on prepayment 
speeds of any potential changes in Enterprise programs, policies, and 
practices developed or considered. Maintaining the existing high degree 
of similarity between the prepayment speeds of the Enterprises' 
securities would be an important objective for FHFA; and (8) Freddie 
Mac would offer investors the option to exchange legacy PCs for UMBS 
backed by the same mortgage loans and would compensate investors with a 
one-time payment for the estimated cost of the change in the payment 
delay.
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    \9\ https://www.fhfa.gov/AboutUs/Contact/Pages/input-submissions.aspx. (select Single Security in pull down menu) (last 
accessed 08/17/2018).
    \10\ Hereinafter, unless otherwise noted, any reference to 
``UMBS'' includes Supers.
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    The May 2015 Update solicited public input on FHFA's 
determinations. While respondents were generally supportive of FHFA's 
determinations, they requested further clarification on the following 
items: (1) How alignment in key Enterprise policies and practices would 
be ensured going forward; (2) how Freddie Mac would determine the one-
time payment amount associated with the change in the security payment 
delay from 45 days to 55 days; (3) the timing of implementation of the 
initiative; and, (4) how certain market risks would be addressed.\11\ 
The proposed rule and subsequent FHFA Updates as discussed below 
address these items.
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    \11\ https://www.fhfa.gov/AboutUs/Contact/Pages/input-submissions.aspx (select Single Security Structure Update 2015 in 
pull down menu) (last accessed 08/17/2018). An August 21, 2015 
letter from the Securities Industry and Financial Markets 
Association (SIFMA) suggested or requested clarity on the following: 
(1) Alignment of Enterprise policies, practices, prepayment speeds, 
and the role of FHFA in ensuring such alignment, including 
recommendations on specific areas for alignment; (2) a formal review 
and comment process for Enterprise policy and practice changes and 
performance monitoring by FHFA; and (3) implementation milestones 
and timeline. https://www.sifma.org/wp-content/uploads/2017/05/sifma-submits-comment-to-the-fhfa-on-the-structure-of-the-single-security-update.pdf (last accessed 08/17/2018).
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    In July 2015, Fannie Mae, Freddie Mac, and CSS assembled a Single 
Security/CSP Industry Advisory Group (IAG) to provide feedback and 
share information with CSS and the Enterprises related to the UMBS and 
the development of the CSP. The group's members included 
representatives from the American Bankers Association, Center for 
Responsible Lending, Financial Services Roundtable, Fixed Income 
Clearing Corporation, Independent Community Bankers of America, 
Mortgage Bankers Association, Securities Industry and Financial Markets 
Association, and the Structured Finance Industry Group. Fannie Mae and 
Freddie Mac also initiated UMBS and CSP web pages that provide regular 
progress updates and allow visitors to register to submit questions.
    On July 7, 2016, FHFA published An Update on Implementation of the 
Single Security and the Common Securitization Platform (July 2016 
Update).\12\ That update noted that in

[[Page 46891]]

response to industry concerns about the potential for differences in 
Fannie Mae and Freddie Mac's policies to affect prepayment speeds, 
FHFA's 2016 FHFA Conservatorship Scorecard \13\ established the 
following goals for the Enterprises: (1) Assess new or revised 
Enterprise programs, policies, and practices for their effect on the 
cash flows of MBS eligible for financing through the TBA market, e.g., 
prepayments and the removal of delinquent mortgage loans from 
securities in exchange for payment of the remaining principal amount to 
the investor (repurchases or buy-outs); (2) Provide ongoing monitoring 
of loan acquisitions, security issuances, and prepayments; and (3) 
Provide all relevant information on a timely basis to support FHFA 
reviews.
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    \12\ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Implementation-of-the-SS-and-the-CSP_772016.pdf (last accessed 08/
17/2018).
    \13\ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016-Scorecard.pdf%20 (last accessed 08/17/2018).
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    On September 6, 2017, Fannie Mae and Freddie Mac published the 
Single Security Initiative Market Adoption Playbook (Playbook).\14\ The 
Playbook provided an explanation of changes to the Enterprises' 
security programs associated with the Single Security Initiative. The 
Playbook provided detailed information about how the transition to UMBS 
and Supers would affect the day-to-day operations of key market 
segments. The Playbook also identified possible actions market 
participants should consider taking to ensure a smooth transition to 
TBA trading in the new securities and served as a tool to help market 
participants adapt their business policies, procedures, and processes 
to the UMBS and Supers prior to their implementation in 2019.
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    \14\ https://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/Single-Security-Initiative-Market-Adoption-Playbook.pdf 
(last accessed 08/17/2018).
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    On December 4, 2017, FHFA published an Update on the Single 
Security Initiative and the Common Securitization Platform (December 
2017 Update) \15\ that focused on Enterprise and FHFA outreach to 
market participants to prepare for implementation. The December 2017 
Update provided additional details on how FHFA would monitor the ex 
post alignment of Enterprise prepayment speeds, and stated that FHFA 
would seek general alignment on the observed prepayments associated 
with Enterprise UMBS at the cohort level. The December 2017 Update 
clarified that by ``general alignment,'' FHFA meant that those cash 
flows should be similar rather than identical; i.e., sufficiently 
similar as to not induce UMBS investors to make stipulated trades.\16\ 
For this purpose, FHFA would define a cohort as TBA-eligible securities 
with the same coupon, maturity, and issuance year.\17\ FHFA announced 
that it would set a minimum standard to trigger a review of the 
differences in prepayment speeds of any given cohort.\18\ In general, 
FHFA would investigate differences between actual Fannie Mae and 
Freddie Mac prepayment speeds when the divergence for a cohort exceeded 
a one-month conditional prepayment rate (CPR) of two percentage 
points.\19\ For a divergence in the one-month CPR of three percentage 
points or more, FHFA would require that the Enterprises report the 
likely cause of the divergence be reported to FHFA. FHFA would base the 
percentage triggers on the current interest rate environment and 
mortgage rates, but the triggers would be subject to change.
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    \15\ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Update-on-the-Single-Security-Initiative-and-the-CSP_December-2017.pdf (last accessed 08/17/2018).
    \16\ In this context, a stipulated trade or ``stip'' trade is a 
trade in which the investor stipulates that it will accept delivery 
only of a security issued by one enterprise or the other, e.g., a 
Freddie Mac UMBS. So, even if industry practice is to allow an order 
for a UMBS to be filled with a UMBS issued by either a Fannie Mae 
and Freddie Mac, the investor would demand that its order be filled 
only with, e.g., a Freddie Mac UMBS (the investor would stipulate 
that it would not accept delivery of a Fannie Mae UMBS).
    \17\ Notwithstanding the December 2017 Update reference to 
``issuance year'' FHFA has used and will continue to use the 
industry standard of loan-origination year.
    \18\ https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/SingleSecurityUpdatefinal.pdf.
    \19\ CPR measures prepayments as a percentage of the current 
outstanding principal balance of the pool of loans backing a 
mortgage-backed security or cohort of those securities. As used in 
the December 2017 Update and in this proposed rule, the CPR is 
expressed as a compound annual rate.
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    Additionally, in response to market participants' requests for more 
transparency about the data FHFA monitors and FHFA's uses of that data, 
the December 2017 Update Appendix B provided samples of data, including 
prepayment data, that FHFA receives and reviews on a monthly basis, as 
well as descriptions of how FHFA uses that data.
    In the first quarter of 2018, FHFA published its first Prepayment 
Monitoring Report (PMR).\20\ Going forward, FHFA plans to continue to 
monitor and publish reports that include third-party data pertaining to 
the alignment of prepayment speeds on the Enterprises' TBA-eligible 
securities, including the one-month CPRs for each cohort.
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    \20\ See e.g., FHFA 1Q2018 Prepayment Monitoring Report, https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Prepayment-Monitoring_1Q2018.pdf (last accessed 08/17/2018).
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    In December 2017, FHFA received a second SIFMA letter, this time 
addressing FHFA's December 2017 Update. In addition to reiterating and 
expanding on its August 21, 2015 letter (see supra note 11), SIFMA 
recommended that FHFA adopt a regulation on how general alignment of 
programs, policies, and practices affecting prepayment speeds will be 
enforced, including thresholds for regulatory action.\21\
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    \21\ https://www.sifma.org/wp-content/uploads/2017/12/SIFMA-Comments-on-December-4-2017-Update-on-the-Single-Security.pdf (last 
accessed 08/17/2018).
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    On March 28, 2018, FHFA announced that on June 3, 2019 the 
Enterprises would start issuing a new common security,\22\ the UMBS, in 
place of their current offerings of TBA-eligible MBS.
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    \22\ ``Common security'' means a security with some common 
features, including: Payment delays of 55 days; pooling prefixes; 
mortgage coupon pooling requirements; minimum pool submission 
amounts; general loan requirements such as first lien position, good 
title, and non-delinquent status; seasoning requirements; and loan 
repurchase, substitution and removal guidelines.
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    On July 10, 2018, FHFA received further input from SIFMA (July 
SIFMA letter).\23\ This proposed rule and current FHFA practices 
address the points in the July SIFMA letter. Section 1248.6(a) of the 
proposed rule goes beyond SIFMA's chief request, and is consistent with 
FHFA's July 2016, March 2017, and December 2017 Updates in that it 
would require FHFA to review any changes to the Enterprises' policies, 
procedures, or practices that are projected to affect cohort level 
prepayments by creating a difference of more than 2% CPR between the 
two Enterprises (the July SIFMA letter suggested a 3% threshold). SIFMA 
also proposed: (1) That FHFA review any Enterprise program anticipated 
to either increase or decrease the population of borrowers by more than 
2%; (2) that FHFA give special consideration to any Enterprise program 
that could materially affect cheapest-to-deliver (CTD) down to the 
decile level; and (3) that any program that materially changes credit 
risk, in the short or long term, taken on by the Enterprises should 
also be reviewed and potential issues assessed. The proposed rule 
answers SIFMA's concerns in proposed Sec.  1248.6(a)(2) which would 
require the Enterprises to submit, in writing, for FHFA's approval, any 
changes that may cause misalignment (i.e., cause the same cohort's one- 
month CPR to diverge by

[[Page 46892]]

more than 2 percent), and specifically address in its submission to 
FHFA borrower impacts and the impact on CTD down to the decile level. 
Moreover, the proposed rule does not limit its application to just 
those metrics, but covers all of SIFMA's suggested measures and any 
other appropriate criteria, under proposed Sec.  1248.3, which requires 
the Enterprises to align programs, policies, and practices to the 
extent that the Enterprises should reasonably foresee that changes 
could cause a misalignment of cash flows to investors in Enterprise 
TBA-eligible securities.\24\ FHFA invites comment on how achievable the 
decile level of analysis is likely to be.
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    \23\ https://www.sifma.org/wp-content/uploads/2018/07/Single-
Security_Priority-Issues-to-be-resolved-before-launch.pdf (last 
accessed 08/17/2018).
    \24\ The proposed rule refers to programs, policies, and 
practices that have the potential to cause a misalignment of cash 
flows to investors in Enterprise TBA-eligible securities as 
``covered programs, policies, and practices.''
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    The July SIFMA letter also highlighted the importance of capturing 
the effect of different interest rate scenarios (plus or minus 100 
basis point shocks, unchanged interest rates, and rates tracking the 
forward curve on the projection of prepayment speeds) on cash flows. 
FHFA has instructed each Enterprise in implementing the 2017 Scorecard 
to use publicly disclosed information to develop non-public quarterly 
reports for FHFA that provide forward payment projections, by coupon, 
for the prior quarter's new issuances of both Enterprises' TBA-eligible 
securities. FHFA requires the reports to include: (1) Projected 
prepayment rates over the next six months under a range of interest 
rate scenarios, and (2) for the past quarter, the identification and 
analysis of any cohort where the prepayment projections between the 
Enterprises' issuances differ by a material amount. FHFA reviews these 
reports, but limits its application of the 2- and 3-percentage point 
thresholds described above by excluding cohorts with loan-origination 
years before 2012 or if the total original or current outstanding 
principal balance of the cohorts across both Enterprises is less than 
$10 billion.
    FHFA requests public comment on whether it should continue that 
practice, and, if so, what metrics it should use to avoid being overly 
comprehensive, while focusing on cohorts that are of interest to the 
industry.
    Another concern raised in the July SIFMA letter relates to the 
transparency of the processes for review and implementation of new or 
changed programs, policies, and practices at the Enterprises. Section 
1248.6 of the proposed rule requires each Enterprise to establish and 
maintain an Enterprise-wide governance process to ensure that any 
proposed changes to covered programs, policies, and practices that may 
cause a reasonably foreseeable misalignment ``are identified, reviewed, 
escalated, and submitted, in writing, to FHFA for review and approval 
in a timely manner.'' Additionally, under current practices, most 
changes are announced publicly by the Enterprises either in advance of 
or at the time of their implementation through updates to their Seller/
Servicer guides. The Enterprises provide advance notice for changes 
that require adjustments from other market participants. For 
significant changes affecting prepayment alignment, FHFA makes 
announcements as well. For example, in August 2017, FHFA issued a news 
release about modification to the Enterprises' high-LTV streamlined 
refinance programs.\25\
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    \25\ https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Modifications-to-High-LTV-Streamlined-Refi-Program-and-Extension-of-HARP-Thru-12-2018.aspx (last accessed 08/17/2018).
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    The July SIFMA letter also recommends that FHFA issue and publicly 
disclose standard reports. SIFMA suggested that the standard reports, 
minimally, should include typical cohort-level prepayments and loan-
level characteristics. However, because cohort-level impact could be 
minimal due to the large size and diversification of annual coupon 
issuance, the July SIFMA letter suggests that special consideration 
should be paid to deviations in more narrow breakouts such as cheapest 
to deliver quartiles, deciles, loan balance breakouts, geographic 
concentrations, and otherwise. Starting in January 2018, FHFA began 
publishing quarterly PMRs, which provide detailed, cohort-level 
information on 30-year, fixed-rate TBA-eligible MBS issued by each 
Enterprise.\26\ The PMRs also include tables showing prepayment 
information at the decile level for each cohort, including average loan 
characteristics within each decile. Section 1248.7 of the proposed rule 
also authorizes FHFA to ``require an Enterprise to undertake additional 
analysis, monitoring, or reporting to further the purposes of [the 
proposed rule].''
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    \26\ See e.g., FHFA 1Q2018 PMR,
    https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Prepayment-Monitoring_1Q2018.pdf (last accessed 08/17/2018).
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III. Purpose of the Proposed Rule

    The Federal Housing Enterprises Financial Safety and Soundness Act 
of 1992 (Safety and Soundness Act) requires FHFA to ensure that the 
operations and activities of each regulated entity foster liquid, 
efficient, competitive, and resilient national housing finance 
markets.\27\ FHFA believes that the proposed rule (described in section 
IV. Proposed Rule) is necessary for the successful adoption of the 
UMBS. FHFA also believes that the proposed rule and successful adoption 
of the UMBS will enhance liquidity, efficiency, and competition in the 
TBA-eligible MBS market.
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    \27\ 12 U.S.C. 4513(a)(1)(B)(ii).
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Liquidity, Efficiency, and Competition

Liquidity

    Currently, Fannie Mae has outstanding roughly $2.3 trillion in 
estimated tradeable TBA-eligible MBS.\28\ Freddie Mac has outstanding 
roughly $1.3 trillion in estimated tradeable TBA-eligible MBS. FHFA 
believes that combining the two markets into a single UMBS market would 
increase the liquidity in Fannie Mae TBA-eligible MBS by adding roughly 
$1.3 trillion to the tradeable supply and increase the liquidity in 
Freddie Mac TBA-eligible MBS by adding roughly $2.3 trillion to the 
estimated tradeable supply. FHFA believes that this increase in 
estimated tradeable supply would result in better execution and help to 
prevent squeezes \29\ in both markets. Moreover, FHFA believes that 
these benefits would be accentuated for lesser-traded TBA-eligible MBS 
(e.g., currently, 30-year coupons of less than 3.0 and greater than 4.5 
percent). That is, FHFA anticipates that TBA-eligible MBS with lower 
trading volumes would benefit most from combining the Fannie Mae and 
Freddie Mac markets. FHFA also believes that the benefits of increased 
liquidity and improved execution will flow through to borrowers.
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    \28\ ``Estimated Tradeable'' here is used to mean all Enterprise 
MBS that are 15-year, 20-year, or 30-year, and that have not been 
resecuritized as collateralized mortgage obligations. Industry 
analysts often exclude pools that are traded in the specified market 
and held by the Federal Reserve Bank of New York.
    \29\ A ``squeeze'' means a lack of supply for TBA-eligible MBS 
sellers to cover their trades. The TBA-eligible MBS seller may face 
penalties for not delivering on a TBA contract, so it may be 
``squeezed'' when the deliverable supply available to cover its 
trade is limited, i.e., the TBA-eligible MBS seller may be forced to 
pay a premium above what it would pay in a liquid market. The cost 
of that premium potentially may be passed to borrowers.
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    FHFA requests comment on the possible magnitude of these effects, 
and the best ways to estimate them.

[[Page 46893]]

Efficiency

    FHFA believes that standardizing Fannie Mae and Freddie Mac 
policies that affect cash flows to investors in TBA-eligible MBS will 
benefit market participants and homeowners in the same manner that 
market participants and homeowners benefit from the standardization 
that underlies TBA eligibility. A Federal Reserve Bank of New York 
publication on TBA Trading and Liquidity in the Agency MBS Market 
(FRBNY Report) argues that standardization ``simplifies the analytical 
and risk management challenges for participants in agency MBS markets'' 
and that ``rather than attempting to value each individual security 
participants need only to analyze the more tractable set of risks 
associated with the parameters of each TBA contract.'' \30\ FHFA 
foresees this proposed rule and the UMBS having an analogous effect on 
investors in TBA-eligible Fannie Mae MBS and Freddie Mac PCs. By 
instituting regulations that further standardize those products, the 
proposed rule and the UMBS would reduce complexity and the cost of 
analytics. As stated in the FRBNY Report, standardization ``helps 
encourage market participation from a broader group of investors, 
notably foreign central banks and a variety of mutual funds and hedge 
funds, translating into a greater supply of capital for financing 
mortgages.'' The FRBNY Report estimated that, with respect to the TBA 
market, increased liquidity from standardization benefited borrowers 10 
to 25 basis points on average in 2009 and 2010, and that the benefits 
of standardization would be larger during periods of greater market 
stress.
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    \30\ https://www.newyorkfed.org/medialibrary/media/research/epr/2013/1212vick.pdf.
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    FHFA requests comments on the benefits of the standardization that 
would result from the proposed rule and UMBS.

Competition

Current State
    FHFA also believes that the proposed rule and the UMBS would 
encourage competition between Fannie Mae and Freddie Mac. For example, 
The Urban Institute has argued that the UMBS would benefit consumers 
with lower pricing for products for which the competition between 
Fannie Mae and Freddie Mac is limited, like Home Affordable Refinance 
Program (HARP) loans.\31\ The Urban Institute contends that borrowers 
with Freddie Mac-owned loans often pay higher rates than those with 
Fannie Mae-owned loans because, under programs like HARP, Freddie Mac 
borrowers can refinance only through Freddie Mac (i.e., Freddie Mac 
does not have to compete with Fannie Mae for these borrowers), and, for 
these loans Freddie Mac does not subsidize its guarantee fees to retain 
business, so borrowers rather than Freddie Mac pay the illiquidity 
premium. The Urban Institute contends that moving to the UMBS would 
remove Fannie Mae's liquidity and pricing advantage, thereby boosting 
competition between Fannie Mae and Freddie Mac, with potential benefits 
to mortgage rates and the availability of mortgage credit.
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    \31\ Laurie Goodman, Lewis Ranieri, Charting a Course to a 
Single Security (September 3, 2014) (https://www.urban.org/sites/default/files/publication/22916/413218-Charting-the-Course-to-a-Single-Security.PDF).
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    FHFA requests comments on the effect of the proposed rule and UMBS 
on the current state of competition between Fannie Mae and Freddie Mac.
Future State
    FHFA believes that this proposed rule and successful adoption of 
the UMBS would better enable transition to any form of future MBS 
market directed by Congress in potential housing finance reform 
legislation.\32\ The UMBS would facilitate greater competition in the 
secondary mortgage market by enabling the entry of future market 
participants. The availability of the CSP and the potential for a new 
guarantor to trade its own UMBS in a fungible UMBS market would remove 
two major barriers to entry--Fannie Mae and Freddie Mac's advantages in 
(a) infrastructure and (b) liquidity--that would otherwise prevent a 
new entrant from competing in the secondary market.
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    \32\ Three major housing finance reform bills have proposed the 
continuance of the CSP and the issuance of some form of common 
security as a means to facilitate new market participants. See, 
Protecting American Taxpayers and Homeowners Act of 2013 (PATH Act), 
H.R. 2767, 113th Cong. Sec. Sec.  311 and 322 (2013); Housing 
Finance Reform and Tax Payer Protection Act of 2013 (Corker-Warner), 
S. 1217, 113th Cong. Sec. Sec.  232 and 223 (2013); Amendment to 
Housing Finance Reform and Tax Payer Protection Act of 2014 
(Johnson-Crapo), S. 1217, 113th Cong. Sec. Sec.  325 and 326 (2014).
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    FHFA requests comments on the effect of the proposed rule and UMBS 
on the future state of competition in the secondary mortgage market.

IV. Proposed Rule

    The Enterprises have been developing the UMBS under auspices of 
FHFA, as their conservator. As described above, FHFA recognizes that 
the market participants will need to accept the fungibility of the 
UMBS, regardless of which Enterprise is the issuer, in order for the 
secondary market to realize the potential liquidity benefits.
    The industry has expressed concerns that Fannie Mae and Freddie Mac 
UMBS may not be truly fungible because differences in Fannie Mae and 
Freddie Mac policies could result in materially differing cash flows 
(as a result of, e.g., differing prepayment speeds).
    FHFA has proposed this rule to ensure that Fannie Mae and Freddie 
Mac programs, policies, and practices that individually have a material 
effect on cash flows (including policies that affect prepayment speeds) 
are aligned and will continue to be aligned. The proposed rule defines 
a materially misaligned program, policy, or practice as one that causes 
a divergence of at least three percentage points in the one-month CPR 
for a cohort or divergence greater than the prevailing threshold set by 
FHFA per proposed Sec.  1248.5(c).
    Generally, this proposed rule would codify existing FHFA 
requirements (as described in section II. Background).
    The fundamental mandate in the proposed rule would be that the 
Enterprises generally align in programs, policies, and practices that 
affect cash flows to TBA-eligible MBS investors. The remaining 
provisions of the proposed rule would establish a regime for 
maintaining alignment through consultation, reporting, and FHFA 
oversight. Proposed Sec.  1248.8 would provide for a de minimis 
exception to eliminate unnecessary administrative burden, particularly 
with respect to pilot or other smaller scale programs. FHFA requests 
comments on the de minimis exception.

V. Request for Comments

    FHFA requests comment on all aspects of the proposed rule, in 
addition to those specifically posed in the preamble.
    Proposed Part 1248 would cover how FHFA oversees the alignment of 
cash flows for Fannie Mae and Freddie Mac TBA-eligible MBS. It would 
make clarifying and general updates to the UMBS regime that is 
currently in development,\33\ but would not fundamentally change the 
UMBS proposal that FHFA provided notice of, solicited input upon, and 
received and considered written data, views, and arguments during the 
60-day period following its 2014 RFI, or the recapitulation of the 
proposal in the subsequent May 2015 Update, July 2016

[[Page 46894]]

Update, March 2017 Update, and December 2017 Update for which FHFA also 
solicited and carefully considered public input. FHFA is providing the 
public with another 60-day period following publication of the proposed 
rule to submit additional comments.
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    \33\ The ``existing UMBS regime'' refers to the UMBS 
characteristics upon which the Enterprises have agreed to prior to 
this rulemaking and the alignment requirements FHFA has imposed 
during the conservatorships.
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VI. Regulatory Impact

A. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501 et seq.), FHFA may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. FHFA has reviewed this proposed rule 
and determined that it does not contain any new, or revise any 
existing, collections of information. As FHFA considers public comments 
and finalizes the rulemaking, the PRA determination will be evaluated.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
agency to analyze a regulation's impact on small entities if the 
regulation is expected to have a significant economic impact on a 
substantial number of small entities. 5 U.S.C. 605(b). FHFA has 
considered the impact of this proposed rule and the General Counsel of 
FHFA certifies that the proposed rule, if adopted as a final rule, is 
not likely to have a significant economic impact on a substantial 
number of small entities because it applies only to the Enterprises, 
which are not small entities for purposes of the Regulatory Flexibility 
Act. Therefore, an initial regulatory flexibility analysis is not 
required.

VII. Statutory Authority

A. Safety and Soundness Act

    The Safety and Soundness Act provides that a principal duty of the 
FHFA Director is ``to ensure that . . . the operations and activities 
of each regulated entity foster liquid, efficient, competitive, and 
resilient national housing finance markets.'' \34\ The Safety and 
Soundness Act also provides that the FHFA Director ``shall have general 
regulatory authority over each regulated entity and the Office of 
Finance, and shall exercise such general regulatory authority, 
including such duties and authorities set forth under 12 U.S.C. 4513, 
to ensure that the purposes of [the] Act, the authorizing statutes 
[including the Federal National Mortgage Association Charter Act 
(Charter Act); and the Federal Home Loan Mortgage Corporation Act 
(Corporation Act)], and any other applicable law are carried out.'' 
\35\
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    \34\ 12 U.S.C. 4513(a)(1)(B)(ii).
    \35\ 12 U.S.C. 4511(b)(2).
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B. Fannie Mae Charter Act

    Among other purposes, the Charter Act requires Fannie Mae to 
``promote access to mortgage credit throughout the Nation (including 
central cities, rural areas, and underserved areas) by increasing the 
liquidity of mortgage investments and improving the distribution of 
investment capital available for residential mortgage financing.'' \36\
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    \36\ 12 U.S.C. 1716(4) (emphasis added).
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C. Freddie Mac Corporation Act

    Similarly, the Corporation Act requires Freddie Mac ``to promote 
access to mortgage credit throughout the Nation (including central 
cities, rural areas, and underserved areas) by increasing the liquidity 
of mortgage investments and improving the distribution of investment 
capital available for residential mortgage financing.'' \37\ FHFA has 
determined that the UMBS will enhance liquidity in national mortgage 
markets and that general alignment of Enterprise programs, policies, 
and practices that affect cash flows to TBA-eligible MBS investors is 
necessary for the UMBS to achieve market acceptance. Moreover, FHFA has 
determined that the proposed rule is authorized both under the FHFA 
Director's duty to ensure that the operations and activities of Fannie 
Mae and Freddie Mac foster liquid, efficient, competitive, and 
resilient national housing finance markets, and the FHFA Director's 
duty to ensure that Fannie Mae and Freddie Mac fulfill the purposes of 
the Charter Act and Corporation Act, which include increasing the 
liquidity of mortgage investments.
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    \37\ Section 301(b)(4) (12 U.S.C. 1451 note) (emphasis added).
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List of Subjects in 12 CFR Part 1248

    Credit, Government securities, Investments, Mortgages, 
Recordkeeping and reporting requirements, Securities.

Authority and Issuance

    Accordingly, for the reasons stated in the Preamble, FHFA proposes 
to amend Chapter XII of Title 12 of the Code of Federal Regulations by 
adding new part 1248 to subchapter C to read as follows:

PART 1248--UNIFORM MORTGAGE-BACKED SECURITIES

Secs.
1248.1 Definitions.
1248.2 Purpose.
1248.3 General alignment.
1248.4 Enterprise consultation.
1248.5 Misalignment.
1248.6 Covered programs, policies, practices.
1248.7 Remedial actions.
1248.8 De minimis exception.

    Authority: 12 U.S.C. 1451, 1716, 4511, and 4526.


Sec.  1248.1  Definitions.

    For the purposes of this part:
    Align or alignment means to be sufficiently similar or sufficient 
similarity as to produce a conditional prepayment rate (CPR) divergence 
of less than two percentage points (or less than the prevailing 
threshold for alignment set by FHFA, per Sec.  1248.5(c)), in the one-
month CPR for a cohort.
    Cohort means all TBA-eligible securities with the same coupon, 
maturity, and loan-origination year.
    Conditional Prepayment Rate or CPR, also known as the constant 
prepayment rate, means the rate at which investors receive outstanding 
principal in advance of scheduled principal payments. This includes 
receipts of principal that result from borrower prepayments and for any 
other reason. The CPR is expressed as a compound annual rate.
    Covered Programs, Policies, or Practices means management decisions 
or actions that have reasonably foreseeable effects on cash flows to 
TBA-eligible MBS investors (e.g., effects that result from prepayment 
rates and the circumstances under which mortgage loans are removed from 
MBS). These include management decisions or actions about: Single-
family guarantee fees; loan level price adjustments and delivery fee 
portions of single-family guarantee fees; eligibility standards for 
sellers and servicers; financial and operational standards for private 
mortgage insurers; streamlined modification and refinance programs; 
removal of mortgage loans from securities; servicer compensation; 
proposals that could materially change the credit risk profile of the 
single-family mortgages securitized by an Enterprise; selling guide 
requirements for documenting creditworthiness, ability to repay, and 
adherence to collateral standards; refinances of HARP-eligible loans; 
contract provisions under which certain sellers commit to sell to an 
Enterprise a minimum share of the mortgage loans they originate that 
are eligible for sale to the Enterprises; loan modification offerings; 
loss mitigation practices during disasters; and alternatives to 
repurchase for representation and warranty violations.

[[Page 46895]]

    Material misalignment means divergence of at least three percentage 
points in the one-month CPR for a cohort, or a prolonged misalignment 
(as determined by FHFA), or divergence greater than the prevailing 
threshold set by FHFA, per Sec.  1248.5(c).
    Misalign or misalignment means diverge by or a divergence of two 
percentage points or more (or more than the prevailing percentage 
threshold set by FHFA, per Sec.  1248.5(c)), in the one-month CPR for a 
cohort.
    Mortgage-backed security or MBS means securities collateralized by 
a pool or pools of single-family mortgages.
    Supers means single-class re-securitizations of UMBS.
    To-Be-Announced Eligible Mortgage-Backed Security (TBA-Eligible 
MBS) means Enterprise MBS (including Freddie Mac Participation 
Certificates, Giants, MBS, UMBS, and Supers; and Fannie Mae MBS, Megas, 
UMBS, and Supers) that meet criteria such that the market considers 
them sufficiently fungible to be forward traded in the TBA market.
    Uniform Mortgage Backed Security or UMBS means a single-class MBS 
backed by fixed-rate mortgage loans on 1-4 unit (single-family) 
properties issued by either Enterprise which has the same 
characteristics (such as payment delay, pooling prefixes, and minimum 
pool submission amounts) regardless of which Enterprise is the issuer.


Sec.  1248.2  Purpose.

    The purpose of this part is to:
    (a) Enhance liquidity in the MBS marketplace, and to that end, 
enable adoption of the UMBS, by achieving sufficient similarity of cash 
flows on cohorts of TBA-eligible MBS such that investors will accept 
delivery of UMBS from either issuer in settlement of trades on the TBA 
market.
    (b) Provide transparency and durability into the process for 
creating alignment.


Sec.  1248.3  General alignment.

    Each Enterprise's covered programs, policies, and practices must 
align with the other Enterprise's covered programs, policies, and 
practices.


Sec.  1248.4  Enterprise consultation.

    When and in the manner instructed by FHFA, the Enterprises shall 
consult with each other on any issues, including changes to covered 
programs, policies, and practices that potentially or actually cause 
cash flows to TBA-eligible MBS investors to misalign.


Sec.  1248.5  Misalignment.

    (a) The Enterprises must report any misalignment to FHFA.
    (b) The Enterprises must submit, in a timely manner, a written 
report to FHFA on any material misalignment describing, at a minimum, 
the likely cause of material misalignment and the Enterprises' plan to 
address the material misalignment.
    (c) FHFA will temporarily adjust the percentages in the definitions 
of align, misalignment, and material misalignment, if FHFA determines 
that market conditions dictate that an adjustment is appropriate.
    (1) In adjusting the percentages, FHFA will consider:
    (i) The prevailing level and volatility of interest rates,
    (ii) The level of credit risk embedded in the Enterprises' TBA-
eligible MBS, and
    (iii) Such other factors as FHFA may, in consultation with the 
Enterprises, determine to be appropriate to promote market confidence 
in the alignment of cash flows to TBA-eligible MBS investors and to 
foster the efficiency and liquidity of the secondary mortgage market.
    (2) If adjusted percentages remain in effect for six months or 
more, FHFA will amend this Part's definitions by Federal Register 
Notice, with opportunity for public comment.


Sec.  1248.6  Covered programs, policies, and practices.

    (a) Enterprise Change Management Processes. Each Enterprise must 
establish and maintain an Enterprise-wide governance process to ensure 
that any proposed changes to covered programs, policies, and practices 
that may cause misalignment are identified, reviewed, escalated, and 
submitted, in writing, to FHFA for review and approval in a timely 
manner.
    (1) Submissions to FHFA must include projections for prepayment 
rates and for removals of delinquent loans under a range of interest 
rate environments and assumptions concerning borrower defaults.
    (2) Submissions to FHFA must include an analysis of the impact on 
borrower demand and impact on the cheapest-to-deliver security down to 
the decile.
    (3) Submissions to FHFA must include an analysis of identified 
risks and may include potential mitigating actions.
    (b) Enterprise Monitoring. Any changes to covered programs, 
policies, and practices that an Enterprise reasonably should identify 
as having been a likely cause of an unanticipated divergence between 
Enterprises in the one month CPR of the same cohort shall be reported 
promptly to FHFA in writing.
    (c) FHFA Monitoring. FHFA will monitor changes to covered programs, 
policies, and practices for effects on cash flows to TBA-eligible MBS 
investors.


Sec.  1248.7  Remedial actions.

    (a) Based on its review of reports submitted by the Enterprises and 
reports issued by independent parties, FHFA may:
    (1) Require an Enterprise to undertake additional analysis, 
monitoring, or reporting to further the purposes of this part.
    (2) Require an Enterprise to change covered programs, policies, and 
practices that FHFA determines may conflict with the purposes of this 
part.
    (b) To address material misalignment, FHFA may require additional 
and expedient Enterprise actions based on:
    (1) Consultation with the Enterprises regarding the cause of the 
material misalignment;
    (2) Review of Enterprise compliance with previously agreed upon or 
FHFA-required actions; and
    (3) Review of the effectiveness of such actions to determine 
whether they are achieving the purpose of this part.


Sec.  1248.8   De minimis exception.

    FHFA may exclude from the requirements of this Part, covered 
programs, policies, or practices that solely affect cohorts with unpaid 
principal balances below $5 billion.

    Dated: September 11, 2018.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2018-20124 Filed 9-14-18; 8:45 am]
 BILLING CODE 8070-01-P