[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