[Federal Register Volume 84, Number 43 (Tuesday, March 5, 2019)]
[Rules and Regulations]
[Pages 7793-7801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03934]



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 Rules and Regulations
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  Federal Register / Vol. 84, No. 43 / Tuesday, March 5, 2019 / Rules 
and Regulations  

[[Page 7793]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1248

RIN 2590-AA94


Uniform Mortgage-Backed Security

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or Agency) is issuing 
a final rule to improve the liquidity of the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac) (collectively, the Enterprises) To-Be-Announced (TBA) 
eligible mortgage-backed securities (MBS) by requiring the Enterprises 
to maintain policies that promote aligned investor cash flows for both 
current TBA-eligible MBS, and, upon its implementation, for 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 one-to-four unit (single-family) properties. The final rule 
codifies alignment requirements that FHFA implemented under the Fannie 
Mae and Freddie Mac conservatorships. The rule is integral to the 
successful transition to and ongoing fungibility of the UMBS. FHFA has 
announced that the Enterprises will begin issuing UMBS in place of 
their current TBA-eligible securities on June 3, 2019.

DATES: This rule is effective: May 6, 2019.

FOR FURTHER INFORMATION CONTACT: Robert Fishman, Deputy Director, 
Division of Conservatorship, (202) 649-3527, [email protected], 
or James P. Jordan, Associate General Counsel, Office of General 
Counsel, (202) 649-3075, [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. Background

    On September 17, 2018, FHFA published in the Federal Register and 
requested public comment on a Notice of Proposed Rulemaking (NPR or 
proposed rule) to improve the liquidity of the Enterprises' TBA MBS by 
requiring the Enterprises to maintain policies that promote aligned 
investor cash flows both for current TBA-eligible MBS, and, upon its 
implementation, for the UMBS--a common, fungible MBS that will be 
eligible for trading in the TBA market for fixed-rate mortgage loans 
backed by one-to-four unit (single-family) properties.
    In response to FHFA's solicitation of comments, FHFA received 12 
comment letters, the majority of which were supportive of the proposed 
rule and the UMBS initiative. FHFA carefully considered all comment 
letters and commenter recommendations. In some instances, FHFA accepted 
commenter recommendations in the formulation of the final rule. A 
discussion of FHFA's rationale follows below.

II. Summary of Comments and FHFA Responses

    The NPR explained in some detail FHFA's basis for believing that 
establishing a unified TBA market for the MBS of both Enterprises would 
enhance mortgage market liquidity, with ultimate benefits for the 
nation as a whole.\1\ While a minority of commenters disputed FHFA's 
conclusion, nothing in the comments received in response to the NPR 
undermined FHFA's basis for the rule.
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    \1\ See 83 FR 46889, 46892-93 (Sept. 17, 2018).
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    One commenter argued that the UMBS would not promote liquidity 
because investors might ``move to stipulated trading . . . [p]rimarily 
because investors do not view Fannie and Freddie MBS as 
interchangeable,'' and that ``Fannie and Freddie MBS are materially 
different [because] they tend to have different `prepayment' speeds,'' 
with Freddie Mac's prepayment speeds being higher. However, the 
principal purpose of the rule is to solve that problem by aligning 
Fannie Mae and Freddie Mac's prepayment speeds. Indeed, during 
conservatorship, and specifically as a result of the Single-Security 
Initiative, prepayment speeds already have moved substantially toward 
alignment.\2\ That movement, reinforced by this rule, removes the 
primary obstacle to UMBS and to the additional liquidity in the 
mortgage market that it will create.
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    \2\ Laurie Goodman and Jim Parrott, A Progress Report on Fannie 
Mae and Freddie Mac's Move to a Single Security (Urban Institute, 
August 2018), p. 5 & Figure 2, available at: https://www.urban.org/sites/default/files/publication/98872/single_security_0.pdf.
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Pool Characteristics

    Several commenters expressed concern that the proposed rule did not 
explicitly require alignment or monitoring of pool characteristics, and 
that this might cause misalignment of cash flows to investors as 
interest rates change. The Securities Industry and Financial Markets 
Association (SIFMA) suggested revisions to the definition of ``covered 
programs, policies, and practices'' to include reference to pool 
characteristics such as a pool's weighted average coupon (WAC) because 
pool characteristics affect prepayment incentives and the Enterprises 
have material influence over them through buy-up/buy-down ratios,\3\ 
pooling decisions on their conduit production, and through discussions 
with seller/servicers. SIFMA also expressed

[[Page 7794]]

concerns about whether the monitoring contemplated in the proposed rule 
would be sufficient to achieve enduring alignment of cash flows to 
investors. SIFMA commented that focusing on the alignment of prepayment 
rates alone could mask problems that might arise as economic conditions 
change, and argued that FHFA should monitor: Gross note rate (WAC); 
loan maturity (Weighted Average Maturity (WAM)); loan age (Weighted 
Average Loan Age (WALA)); credit score (FICO); loan-to-value (LTV) 
ratio; loan balance; loan purpose; originator mix; and geographic 
distribution. SIFMA contended that differences in any of these pool 
characteristics could drive significant differences in prepayment 
rates. With respect to WAC, SIFMA suggested three thresholds that 
should trigger remedial action. The first threshold would be a 
difference of 10 basis points between the corresponding worst-to-
deliver cohorts of Fannie Mae and Freddie Mac TBA-eligible securities; 
the second would be a difference of 5 basis points for the total 
production; and the third threshold would be a 75 basis point cap on 
the difference between the WAC and the coupon on the MBS for any coupon 
cohort that comprises at least ten percent of an Enterprises' annual 
production.
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    \3\ MBS coupon rates are standardized by every half percentage 
(3.50%, 4.00%, 4.50%, and so on). The coupon rate on a MBS is the 
net of: (1) The mortgage rate paid by borrowers, minus; (2) the 
servicing fee retained by lenders, and minus; (3) the guarantee fee 
(g-fee) retained by the Enterprises. Since mortgage loan rates tend 
to be set every one-eighth of a percentage point, this formula often 
does not end in a net loan rate slotting into a half a percentage 
point. To match the net rate of the loan to an MBS coupon, lenders 
may need to adjust the ongoing g-fee retained by the Enterprises to 
fit the loan into a certain MBS coupon rate. To do so without 
changing the present value of the g-fee to the Enterprises or the 
lender, an upfront payment must be made. The lender may increase the 
ongoing g-fee (a buy-up) to fit the loan into a lower coupon MBS, in 
which case the Enterprise will make an upfront cash payment to the 
lender, or decrease the ongoing g-fee to fit the loan into a higher 
coupon MBS (a buy-down), in which case the lender will make an 
upfront cash payment to the Enterprise. The amount paid for a buy-up 
or buy-down will be calculated based on the Enterprises prevailing 
buy-up and buy-down ratios. The Enterprises quote prices for buy-ups 
and buy-downs in 100 basis point increments. As an example, a buy-up 
ratio of 5 would indicate that the price for increase of 100 basis 
points in the ongoing g-fee or buy-down of 100 basis points of in 
the ongoing g-fee would cost $5.00 per $100 of the loan's principal 
balance. Thus, for a buy-up or buy-down ratio of 5, 25 basis points 
of g-fee, and $100,000 loan, the payment would be $1,250 ($5.00 
times 0.25 times 1,000).
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    FHFA agrees that pool characteristics influence cash flows to TBA-
eligible MBS investors, and, therefore, FHFA considers pool 
characteristics already to be covered by the rule as proposed. FHFA 
also currently receives and monitors data on pool characteristics and 
servicer performance, and publishes quarterly Prepayment Monitoring 
Reports (PMRs) that include data on most of the pool characteristics 
enumerated by SIFMA. FHFA shares the view that the fungibility of UMBS 
would be enhanced by placing further restrictions on the pooling of 
individual loan note rates. To do so, FHFA, acting as conservator, has 
instructed the Enterprises to modify their pooling practices with 
respect to all fixed-rate products such that the rate on any mortgage 
in a pool backing a given security be not more than 112.5 basis points 
greater than the coupon on that security. In addition, the Enterprises 
are to limit the maximum servicing fee for each loan to no more than 50 
basis points; the 50 basis point maximum servicing fee includes the 
standard 25 basis point servicing fee. Because these changes need to be 
coordinated with loan originators, they will not take effect until 
later in 2019. As is the case with other programs, policies, and 
practices that FHFA has required to be aligned during the 
conservatorships of the Enterprises, when the final rule becomes 
effective, the new loan note rate and servicing fee requirements will 
be a baseline from which any changes would be evaluated. In one of its 
early Single Security Updates, FHFA originally included note rate 
requirements for single-issuer and multiple-lender UMBS at no less than 
25 basis points to no more than 250 basis points above the security 
pass-through rate.\4\ FHFA believes the new tighter restrictions will 
serve to both align prepayment speeds across the TBA-eligible 
securities issued by the Enterprises and make that alignment more 
durable irrespective of interest rate changes. FHFA evaluated a number 
of potential restrictions, including those suggested by SIFMA, and 
believes this approach will be both effective and easier to 
operationalize and monitor than the alternatives.
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    \4\ See An Update on the Structure of the Single Security (May 
15, 2015), p. A-3, available at: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Single%20Security%20Update%20final.pdf.
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Definition of Covered Programs, Policies, and Practices

    Several commenters recommended expanding the list of covered 
programs, policies, and practices enumerated in the rule. JPMorgan 
Chase Bank recommended adding mortgage and loss mitigation products and 
practices, and servicing requirements including foreclosure 
requirements and timelines, advances, purchases out of pools, and 
remittances. SIFMA recommended aligning ``servicing policies and 
practices.'' PIMCO argued that maximum alignment would ``require 
selling guides for Fannie and Freddie to be uniform.'' The Mortgage 
Bankers Association (MBA) suggested leaving the rule's list of 
enumerated programs, policies, and practices open-ended by adding an 
introductory clause to the effect of ``include but are not limited to . 
. .'' or concluding the definition with language to the effect of ``and 
other factors that FHFA deems appropriate.''
    FHFA does not believe that an exhaustive list of servicing or other 
activities that affect cash flows to investors is necessary because, to 
the extent the activities affect cash flows, they are covered already. 
However, the final rule does expand upon the explicitly enumerated 
programs, policies, and practices covered by the rule in Sec.  
1248.6(a). There the final rule reaffirms that programs, policies, and 
practices that affect cash flows to TBA investors that were aligned 
under conservatorship must remain aligned under the final rule, subject 
to the final rule's change management provisions. FHFA agrees that 
MBA's suggested revisions would reinforce the rule's flexibility and 
serve the rule's purpose. FHFA modified the definition of covered 
programs, policies, and practices in Sec.  1248.1 to emphasize that its 
list of decisions and actions is not exclusive.

Definition of Alignment

    Several commenters recommended modifying the definition of 
alignment to focus on cheapest-to-deliver cohorts. SIFMA reiterated its 
view that a year/issuer/coupon cohort is too broad. SIFMA stated that 
FHFA should ``at a minimum, implement a year/issuer/coupon standard 
that excludes specified pools . . . which could be defined as pools 
that trade at a premium to the Bloomberg/Barclays MBS index for the 
definition of alignment.'' SIFMA also recommended the use of the 
``worst quartile of production for each GSE on a rolling three-month 
basis (comparing three 1-month CPR measures)'' and suggested a variable 
threshold that adjusted for the prepayment environment. Wellington 
Management Company also suggested ``the worst quintile.'' PIMCO 
suggested focusing the definition of alignment on the cheapest-to-
deliver decile ``to make it more consistent with what drives pricing in 
the TBA market.'' Each of these commenters also suggested that 
specified pools should be excluded from the calculation. Both SIFMA and 
Wellington suggested averaging the worst one-month data on a rolling 
three-month basis. The Community Mortgage Lenders of America (CMLA) 
suggested using a three-month moving average of one-month conditional 
prepayment rates (CPRs) \5\ ``to reduce the influence of random and 
otherwise non-systematic differences between the prepayment rates of 
two Enterprises and allow for more meaningful monitoring of relative 
prepayment speeds.''
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    \5\ The CPR, also known as the constant prepayment rate, 
measures prepayments as a percentage of the outstanding principal 
balance of the pool of loans backing a MBS or cohort of those 
securities. The CPR is expressed as an annual rate.
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    FHFA agrees that the purposes of the rule will be better served by 
revising the definition of alignment to include a focus on pools that 
are least desirable to investors. Accordingly, the final rule broadens 
the definitions of alignment, misalignment, and material misalignment 
to include consideration of the fastest paying quartiles of a cohort. 
The fastest paying quartile of a cohort is defined as the quartile of a 
cohort that has the fastest prepayment

[[Page 7795]]

speeds as measured by the three-month CPR and exclusive of specified 
pools.\6\
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    \6\ In a falling interest rate environment, faster prepayments 
are undesirable because MBS prices are often above par and 
prepayments are received at par. For example, an investor might buy 
an MBS with a price of $102 per $100 of principal outstanding. If 
the MBS is immediately prepaid, the investor will lose two cents per 
dollar of principal. In a rising interest rate environment, slower 
paying MBS will be undesirable as investors will be buying the 
securities at a discount and prepayments will still be received at 
par. Similarly, pools that trade on as specified rather than TBA may 
change with the interest rate environment. Therefore, FHFA has 
reserved the option in Sec.  1248.5(d) to temporarily or permanently 
change the definitions of cohort, fastest paying quartile, and 
specified pools as market conditions or other factors change.
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    To avoid confusion, definitions of both the three-month CPR and 
specified pools have been added to Sec.  1248.1. FHFA believes that the 
three-month CPR will capture the same prepayment patterns as a rolling 
average of one-month CPRs and will reduce operational burden.
    Specified pools are defined in the final rule as those with a 
maximum loan size of $200,000, a minimum loan-to-value ratio at the 
time of loan origination of 80 percent, a maximum FICO score of 700, 
where all loans finance investor-owned properties, or where all loans 
finance properties in the states of New York or Texas or the 
Commonwealth of Puerto Rico. This definition is similar to but not the 
same as SIFMA's recommended definition and is based on industry 
practice.\7\ FHFA believes that SIFMA's recommended definition would be 
more difficult to align to and unnecessarily increase regulatory burden 
on the Enterprises because the set of pools that trade at a premium to 
an MBS can change daily.
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    \7\ See, for example, Bloomberg, Waterfall Spec Cohorts: 
Definitions and Syntax.
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    FHFA believes that SIFMA's proposal of a variable threshold would 
create a number of difficulties with respect to administration of the 
rule. Such difficulties would arise from the fact that at any given 
time different thresholds would apply to different cohorts. The rule's 
thresholds, however, may need to be adjusted to respond to changing 
market conditions on an exigent basis to maintain the liquidity of UMBS 
without the time that would be required for a typical rulemaking 
process.\8\ To allow flexibility to respond to changing market 
practices or conditions, new Sec.  1248.5(d) provides authority for 
FHFA to temporarily change the definitions of cohort or specified pools 
with public notice. If the changed definitions are in place for at 
least six months, FHFA will amend the definitions by Federal Register 
notice with the opportunity for public comment. Paragraph (d) of Sec.  
1248.5 provides that a temporarily adjusted definition will remain in 
effect for six months unless FHFA has already announced a reversion to 
the previously prevailing definition or initiates a notice and comment 
rulemaking process to permanently change a definition. In the latter 
case, the temporarily adjusted definition will remain in place until 
the conclusion of the notice and comment process. This paragraph 
parallels Sec.  1248.5(c) concerning adjustment of the percentage 
thresholds in the definitions of align, misalignment, and material 
misalignment. Paragraph (c) of Sec.  1248.5 has also been amended to 
clarify what would happen with respect to temporarily adjusted 
percentages at the end of six months, which was not explicitly stated 
in the proposed rule.
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    \8\ See 5 U.S.C. 553(b)(3)(B).
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    In conjunction with this change, FHFA has also changed the 
definition of alignment and misalignment to include a threshold for 
divergences between the three-month CPRs of the fastest paying 
quartiles of those cohorts (5 percentage points) in addition to the 
threshold in the proposed rule for divergences between the three-month 
CPRs of the corresponding cohorts of the Enterprises' TBA-eligible 
securities (2 percentage points). Similarly, FHFA has changed the 
definition of material misalignment to include thresholds for the CPR 
divergences between the fastest paying quartiles of those cohorts (8 
percentage points in the three-month CPR) in addition to the threshold 
in the proposed rule for CPR divergences between corresponding cohorts 
of the Enterprises' TBA-eligible securities (3 percentage points in the 
three-month CPR). As suggested by commenters, FHFA has changed the 
timeframe of the thresholds from one month to three months. FHFA agrees 
with commenters that a three-month measure appropriately reduces the 
influence of random and otherwise non-systematic differences between 
Enterprise cohorts or fastest paying quartiles.
    FHFA set the five and eight percentage point thresholds after 
analyzing the recent differences in three-month CPRs for the fastest 
paying quartiles of cohorts of the Enterprises' 30-year TBA-eligible 
MBS with coupons of 3, 3.5, 4, and 4.5 percent and loan-origination 
years between 2012 and 2018. Data for many coupon/origination-year 
cohorts for Enterprise 30-year TBA eligible securities showed that 
prepayment rates for the fastest paying quartiles were often, but not 
universally, well within the 5 percentage point CPR limit. For two 
cohorts, the eight percentage point limit was frequently exceeded, 
reflecting prior market interest rate and other conditions as well as 
differences between the Enterprises in pooling practices. For example, 
the cohort of securities backed by loans originated in 2016 and paying 
a 4 percent coupon has exceeded the eight percent threshold 17 times, 
most recently in November 2018. Given that no attempt had been made 
during this timeframe at aligning prepayments across the fastest paying 
cohorts, FHFA believes that the Enterprises will be able to attain 
alignment of the fastest paying cohorts within the percentage 
thresholds set in the rule.\9\ Further, FHFA believes that those 
thresholds, when combined with the thresholds for larger, overall 
cohorts, should provide more consistency of cash flows to investors and 
further the purposes of the rule.
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    \9\ FHFA has previously published some of the options the 
Enterprises have for attaining alignment at the cohort level. The 
same or similar options may apply to aligning the fastest paying 
quartiles. See An Update on the Single Security Initiative and the 
Common Securitization Platform (December 2017), available at: 
https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/Update-on-the-Single-Security-Initiative-and-the-CSP_December-2017.pdf.
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    Ultimately, the appropriate thresholds are those that provide 
investors with sufficient confidence that they are willing to settle 
TBA trades with either Freddie Mac or Fannie Mae UMBS. Once the rule 
becomes effective, FHFA will apply these thresholds to all cohorts 
whose combined outstanding unpaid principal balances of securities 
issued by both Enterprises exceeds $10 billion, monitor alignment of 
covered programs, policies, and practices that could affect alignment 
of fastest paying quartiles and take appropriate actions to understand 
and remediate misalignments and to support fungibility. Further, FHFA 
retains the flexibility to adjust either set of thresholds on a 
temporary basis or permanently should market conditions warrant.
    FHFA understands commenters' concerns about market functioning and 
the desirability of monitoring absolute performance. However, as 
discussed below, FHFA continues to believe that relative measures are 
appropriate, and that incorporating an absolute performance metric is 
both unnecessary and beyond the scope of the final rule.

Competition

    Commenters were split as to the effect of the proposed rule and 
UMBS initiative on competition. PIMCO commented that ``Fannie has a 
larger market share with originators and more

[[Page 7796]]

investor-demand . . . because Fannie provides better, more tailored 
customer service and produces bonds with more desirable performance 
characteristics, not because Fannie has an embedded, structural 
advantage. Fannie and Freddie are competing on a level playing field, 
and Fannie is simply winning.'' The CMLA opined that consumers would be 
harmed if attractive and innovative program features cannot be offered 
to lenders by Fannie Mae and Freddie Mac as an outgrowth of the 
alignment requirement. Conversely, the National Association of 
Federally-Insured Credit Unions (NAFCU) commented that ``not only will 
the UMBS create competition within the GSEs with equalized pricing, but 
the reduced barriers to entry will encourage private financial 
institutions to again enter the market as they were prior to the 
financial recession.'' MBA commented that ``FHFA is correct to focus 
competition between the Enterprises on factors such as product 
offerings, technology, and customer service. These are the areas in 
which competition leads to innovation or better execution, which then 
produces more efficient markets and lower costs for borrowers. Simply 
put, the liquidity of their securities should not be a basis for 
competition between the Enterprises, and there is no compelling reason 
for Fannie Mae and Freddie Mac TBA-eligible securities to trade in 
separate markets.''
    Several commenters supported the proposed de minimis exception to 
alignment requirements and affirmed that it would encourage innovation. 
Many of the same commenters suggested broadening the exception. The 
CMLA proposed ``that loans issued under new programs that could cause 
cash flow misalignment and thus be subject to the FHFA's scrutiny, as 
outlined in Sec.  1248, be securitized as part of the [SIFMA good 
delivery guidelines] de minimis exemption normally utilized for `super-
conforming' loans. Under this proposal, 10 percent of any deliverable 
UMBS pool's balance might consist of both super-conforming loans and 
loans issued under new programs subject to FHFA scrutiny.''
    FHFA distinguishes between the effects of this rule on competition 
between the Enterprises as sellers of TBA-eligible MBS to investors and 
as buyers of TBA-eligible mortgages from originators. The setting of 
any market standard can be a limit on competition in that market. Such 
limitations can create economic benefits if they lower the effects of 
market imperfections such as barriers to entry, asymmetric information, 
or excessive transactions costs. Where market standards create market 
efficiencies, they can also create positive spillover effects in 
related markets. With respect to TBA-eligible securities, 
standardization has special benefits because it enables the functioning 
of the TBA market, which not only lowers interest rates for borrowers, 
but also enables borrowers to lock in interest rates at the time of 
loan approval, well in advance of closing, and avoid interest-rate 
risks that individual borrowers are ill-equipped to manage. Therefore, 
the optimal balance between competition and standardization may be 
different in the TBA-eligible mortgage market than in markets for many 
other goods and services.
    FHFA continues to believe that the creation of a uniform, common 
Enterprise MBS will improve overall execution in the TBA market and 
benefit participants in related markets. FHFA has consistently iterated 
its belief that consolidation of the Enterprise TBA markets coupled 
with general alignment of cash flows from cohorts of UMBS issued by 
each Enterprise should allow benefits to flow to mortgage borrowers. 
Such benefits stem from increased competition between the Enterprises 
to purchase mortgages from mortgage originators. At the same time, 
general alignment coupled with the de minimis exception in Sec.  1248.8 
should allow continuing innovation in the origination and servicing 
markets. To further address concerns about the rule's effect on 
innovation, FHFA has modified the definition of cohort to incorporate 
levels exceeding $10 billion in combined unpaid principal balance of 
TBA-eligible securities issued by both Enterprises. FHFA believes the 
final rule appropriately weighs the potential benefits and costs with 
respect to competition in these markets.

Competitive Behavior

    Several commenters (SIFMA, Structured Finance Industry Group 
(SFIG), and PIMCO) expressed concern that the Enterprises would take 
actions that, notwithstanding the purposes of the rule's alignment 
requirements, would be detrimental to security quality. SIFMA 
emphasized in its comment letter the link between TBA pricing and 
mortgage rates paid by consumers. SIFMA's reasoning is that actions 
taken by one Enterprise that are adverse to investors (e.g., actions 
that accelerate prepayments or incentivize churning of mortgages) will 
harm the UMBS value of not just the Enterprise that took the action, 
but also the value of the competing Enterprise's UMBS, since both 
Enterprises' UMBS will be deliverable into the same contracts. SFIG and 
PIMCO expressed similar concerns about a potential decrease in the 
quality of cheapest-to-deliver collateral. That is, the market forces 
that would punish an Enterprise for programs, policies, or practices 
that harm investors would be weakened and actions an Enterprise may not 
have taken when its securities traded in a separate market may now be 
more attractive because the damage to the value of both Enterprises' 
UMBS would be equal given that they both are deliverable into the same 
TBA contracts. In a countervailing comment, NAFCU commented that the 
reduced incentives for the Enterprises to create a dominant security 
could improve the market for certain first-mortgage loans that are 
currently less traded. Other commenters expressed concern that given 
the choice between two Enterprise programs, policies, and practices, 
the Enterprises may align to the less desirable program, policy, or 
practice from the perspective of investors, lenders, or consumers.
    FHFA understands the concerns expressed by these commenters, and, 
has amended the rule to require FHFA to consider costs and benefits to 
investors, lenders, and mortgage borrowers as it reviews the 
Enterprises' covered programs, policies, and practices. Moreover, FHFA 
believes that strong market incentives exist for the Enterprises to 
avoid a potential decrease in the quality of cheapest-to-deliver 
collateral. Such incentives arise from lower market prices for lower 
quality securities and from the loss of market share associated with a 
reputation for not consistently acting with consideration toward 
investors. Lower security prices can both undermine an Enterprise's 
competitive position in purchasing loans from lenders and affect an 
Enterprise's profitability. These incentives survive even with a 
combined UMBS market because investors can conduct stipulated trades 
that restrict the issuer, the primary reason that commenter PIMCO gave 
for expressing skepticism about the success of the UMBS. While the 
cause PIMCO identified for such stipulated trading--misaligned 
prepayment speeds--is addressed by this rule, the risk of stipulated 
trading will continue to be a potent incentive for the Enterprises to 
maintain the quality of their securities. Potential competition also 
exists from lenders who choose to retain their mortgage production in 
their own portfolios and from private securitizations.

[[Page 7797]]

Market Adoption

    Many commenters noted the importance of a smooth transition to UMBS 
and several suggested specific ways to improve the likelihood of a 
smooth transition. SIFMA noted the importance of FHFA finalizing the 
proposed rule. SFIG and PIMCO highlighted the importance of investors 
exchanging legacy Freddie Mac securities for UMBS to ensure liquidity 
in the new market. SFIG recommended that FHFA work with industry 
stakeholders and market participants to determine whether an inducement 
fee would be cost-effective in increasing investor exchanges. PIMCO 
recommended that FHFA consider a temporary and ``sufficiently large'' 
inducement fee to incentivize investors to exchange. SFIG also 
indicated that investors need more information on the tax consequences 
of the exchange and recommended that the Enterprises' work with the 
Internal Revenue Service (IRS) should continue. Comment letters from 
trade associations representing credit unions, community banks, and 
home builders emphasized the importance of the secondary mortgage 
market to their constituencies. The National Association of Home 
Builders (NAHB) urged FHFA and the Enterprises to continue and to 
enhance investor outreach.
    FHFA agrees with SIFMA that it is important to finalize the rule in 
order to facilitate adoption of the UMBS by providing a higher level of 
market certainty. In addition, while many of the comments received, 
e.g., requests to participate in advisory committees, are beyond the 
scope of the proposed rule, FHFA agrees with commenters about the value 
and critical nature of a smooth transition. FHFA has worked closely 
with the Enterprises, the Securities and Exchange Commission, and the 
IRS to create clarity for investors facing the decision to exchange 
legacy securities for UMBS. FHFA has worked with Freddie Mac to 
evaluate the desirability of an inducement fee related to that exchange 
and has made a determination that such a fee would not be necessary at 
this time. FHFA and the Enterprises have actively engaged in industry 
outreach to ensure all market participants are aware of and prepared 
for the transition to UMBS. FHFA's outreach efforts are described in 
FHFA Updates on the Single Security Initiative and the Common 
Securitization Platform \10\ as well as on the Enterprises' Single 
Security web pages.\11\
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    \10\ See https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Securitization-Infrastructure.aspx.
    \11\ See http://fanniemae.com/portal/funding-the-market/single-security/index.html and http://www.freddiemac.com/mbs/single-security/.
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Remedial Actions and Potential Remedies

    Several commenters expressed concerns about the remedial actions 
that would be triggered under the proposed rule. SIFMA recommended that 
FHFA expand the enumerated menu of potential remedies in the rule to 
include a broad range of potential actions. SIFMA's list of potential 
actions FHFA could take or require an Enterprise to take includes the 
termination of a program, policy, or practice, the implementation of a 
comparable program, policy, or practice by the competing Enterprise, 
and levying of fines or other penalties, the repurchase of loans at 
market levels, and clarification of the investor claims process. SFIG 
requested that FHFA clarify how the required investigations would be 
conducted, by whom, and what the consequences of those investigations 
would be, including an explanation of remediation steps and how they 
would address misalignment or material misalignment. PIMCO focused on 
the need for a meaningful form of reimbursement for market participants 
when misalignment occurs. Wellington agreed with SIFMA that FHFA should 
have greater authority to enforce alignment and address prior 
misalignment, indicating that the proposed rule appears to limit FHFA 
authority to consultation and review without reference to enforcement. 
Wellington indicated that the final rule should describe the potential 
consequences to the Enterprises for material misalignment. MBA 
commented that the consequences of misalignment beyond the prescribed 
thresholds should be sufficiently potent to swiftly remediate 
divergences.
    FHFA agrees that enumerating the potential actions FHFA may take to 
correct material misalignment in the regulatory text will enhance the 
likely effectiveness of the rule and has modified Sec.  1248.7 
accordingly. New Sec.  1248.7(c) provides that FHFA, at its discretion, 
may require an Enterprise to take actions to remediate a significant 
misalignment, including the termination of a program, policy, or 
practice, or the implementation of a comparable program, policy, or 
practice by the competing Enterprise. Failure to align covered 
programs, policies, and practices would be a violation of the 
regulation (Sec.  1248.3) and, therefore, grounds for a formal 
enforcement action by FHFA. As is the case for failure to comply with 
any of FHFA's rules, FHFA's enforcement statute, 12 U.S.C. 4636, 
authorizes FHFA to impose civil money penalties on an Enterprise that 
fails to align programs, policies, or practices in accordance with the 
final rule.
    FHFA has not incorporated into the rule any requirements for the 
Enterprises to take investor-facing actions as requested by SIFMA and 
PIMCO, as the Enterprises already have processes in place for investors 
to request compensation. Each Enterprise administers its own investor 
claims and compensation processes.\12\
---------------------------------------------------------------------------

    \12\ The current investor claims process of each Enterprise is 
described below. These processes are generally subject to revision 
and may evolve, in particular, with changes related to the 
introduction of UMBS.
    At Freddie Mac, claims are usually initiated by investors 
contacting its Investor Inquiry or Single Family Securitization 
Department with a question about the performance of one of its 
mortgage-related securities. For example, such a question could 
relate to the investor's perception of fast or aberrant prepayment 
behavior of, or possibly incorrect pooling related to, Freddie Mac 
mortgage-related securities. Depending on the findings of an 
internal inquiry and possible consultation with its counsel, Freddie 
Mac may determine that some form of compensation to the investor 
would be warranted. If that is the case, Freddie Mac will require 
that the investor substantiate its ownership of the affected 
security during the relevant time period. Depending on the nature 
and materiality of the facts, Freddie Mac may publicly disclose the 
facts so that other affected investors are aware of the issue and 
can establish any claims. Alternatively, Freddie Mac may itself 
discover the factual situation, which, under certain circumstances, 
may warrant compensation to certain affected mortgage-related 
securities holders. In such circumstances, Freddie Mac may publicly 
disclose the facts relating to the issue so that affected investors 
can contact Freddie Mac to establish a claim to compensation.
    At Fannie Mae, a claims process is available to investors who 
believe they may have been financially harmed due to a unique 
incident or potential disclosure issue on a Fannie Mae-issued 
security. As part of the investor's submission, the investor must 
include the reason for the claim, evidence of ownership of the 
security, evidence of the price paid for the security, and 
calculations of the alleged damages and supporting analytics. Fannie 
Mae reviews the submission and determines if the circumstances were 
a result of normal business activity or instead were caused by an 
error. If the claim is determined to be a result of normal business 
activity, Fannie Mae will contact the investor and inform him or her 
of the findings. If the event is determined to be a result of an 
error, Fannie Mae will confirm ownership of the security at the time 
the event occurred, perform an independent assessment of the value 
of the claim, and contact the investor to determine an appropriate 
resolution. Once the investor and Fannie Mae have agreed on a 
resolution, both parties will sign an agreement form and Fannie Mae 
will execute the agreed upon resolution.
---------------------------------------------------------------------------

Monitoring

    In addition to SIFMA's comments on the desirability of monitoring 
WAC

[[Page 7798]]

differences, SIFMA also commented that gaps in servicer performance 
between the Enterprises need to be monitored and investigated, and that 
FHFA should monitor overall performance in addition to relative 
performance. FHFA currently receives and monitors data that include 
information on servicer performance, and publishes that information in 
quarterly PMRs. FHFA understands the desirability of monitoring 
absolute performance of Enterprise TBA-eligible securities, but 
believes incorporating such a requirement into the final rule is both 
unnecessary and beyond the rule's scope. The CMLA commented that FHFA 
should monitor the prevalence of stipulated trades \13\ in the TBA 
market in conjunction with its monitoring of prepayment speeds. FHFA 
believes that a requirement to undertake such monitoring is both 
unnecessary given current practices and beyond the scope of the final 
rule. FHFA monitors TBA activity using data collected by and obtained 
from the Financial Industry Regulatory Authority (FINRA).\14\ That 
data, which must be reported by both broker-dealers and automated 
trading systems subject to FINRA regulation, contains information on 
stipulated trading activity. The Enterprises also monitor the TBA 
market.
---------------------------------------------------------------------------

    \13\ Stipulated trades are TBA trades in which the buyer 
stipulates additional characteristics that pools delivered by the 
seller must meet in order to settle the trade.
    \14\ FINRA developed the Trade Reporting and Compliance Engine 
(TRACE) system in 2002 to increase transparency in the bond market 
by requiring FINRA-registered broker-dealers to report data on the 
size and price of covered transactions. FINRA extended reporting 
requirements to MBS transactions in May 2011.
---------------------------------------------------------------------------

    In its comment letter, NAHB called on FHFA to institute a formal 
process to review ongoing prepayment behavior of UMBS. Echoing an 
earlier comment received from SIFMA,\15\ NAHB suggested that such a 
process might take the form of a committee that meets quarterly or 
semi-annually and should include executives from FHFA, Fannie Mae, 
Freddie Mac, and select industry participants. NAFCU encouraged FHFA to 
include credit union professionals in the Single Security/Common 
Securitization Platform Industry Advisory Group.
---------------------------------------------------------------------------

    \15\ See https://www.sifma.org/wp-content/uploads/2018/07/Single-Security-%E2%80%93-Priority-Issues-to-be-resolved-before-launch.pdf.
---------------------------------------------------------------------------

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

Transparency

    NAHB and MBA made a number of recommendations with respect to 
transparency. NAHB recommended that a process should be in place to 
notify market participants if a program is expected to affect 
prepayment speeds. NAHB argued that such transparency would assure 
market participants that if issues arise that appear to cause 
prepayment speed differences they will be addressed quickly. NAHB also 
recommended that FHFA establish new product implementation guidelines 
that emphasize transparency and include an opportunity for feedback by 
market participants when a product or program has the potential to 
impact prepayment speeds. As discussed previously, NAHB also 
recommended that FHFA implement a formal process to review ongoing 
prepayment behavior of the UMBS.
    Currently, significant changes to Enterprise programs, policies, 
and practices are announced through their websites, usually in advance 
of their effective dates to allow sellers, servicers, and other market 
participants to make any necessary adjustments related to such changes, 
and FHFA believes the current practices are adequate to address NAHB's 
concern. The development of new product implementation guidelines, 
however, is beyond the scope of the final rule.
    The MBA comment letter contained two specific recommendations to 
increase transparency in FHFA oversight. First, MBA recommended that 
FHFA provide public notice (but not request comment) at the time of any 
adjustments to the thresholds defining acceptable divergences in 
prepayment speeds per Sec.  1248.5. Second, MBA recommended that the 
final rule require FHFA to publish quarterly PMRs similar to those that 
it currently publishes on a voluntary basis.
    FHFA is committed to transparency in its regulatory activities. 
FHFA intends to publicly announce any changes to Sec.  1248.5 
thresholds at the time of any temporary or permanent changes. FHFA has 
revised Sec.  1248.5(c) to require a contemporaneous public 
announcement of any temporary change to the thresholds. FHFA also 
intends to continue to produce quarterly PMRs, but FHFA believes that 
incorporating a requirement that it continue to publish periodic PMRs 
is beyond the scope of the final rule, which is focused primarily on 
the continued alignment of Enterprise programs, policies, and practices 
that foreseeably affect cash flows to investors.

Potential Adverse Effects

    Several commenters focused on potential adverse effects of the move 
to UMBS. The CMLA noted that FHFA might need to consider whether a 
return to conservatorship by one Enterprise means that the other must 
also undergo a change in its legal status, including being placed in 
conservatorship, in order to avoid fragmentation of the UMBS TBA market 
due to credit considerations. FHFA believes the conservatorship issue 
is beyond the scope of the final rule. Some commenters (PIMCO, CMLA) 
expressed concern that stipulated trades could fragment the TBA market 
and undermine the potential liquidity gains from market consolidation. 
Some commenters (CMLA, Independent Community Bankers of America (ICBA)) 
also expressed concern that the alignment or remediation required under 
the rule could curtail or prevent the development of programs, 
policies, and practices that were beneficial to lenders and consumers. 
ICBA questioned whether standardizing remittance cash flows would 
benefit homeowners, arguing that any benefit would accrue mostly to 
larger servicers and that any benefit to MBS investors would be bid 
into the price of the securities.
    FHFA recognizes the concerns about market fragmentation; in fact, 
they are an important impetus for promulgating the final rule. FHFA 
also shares concerns about inhibiting innovations that benefit 
consumers and other market participants. Section 1248.8 provides for a 
de minimis exception to foster such innovations. Sections 1248.3 and 
1248.7 also have been amended to require the Enterprises and FHFA to 
consider both the effect of policies, programs, and practices on the 
pricing of TBA-eligible securities and the costs and benefits to 
investors, lenders, and mortgage borrowers.

III. 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 final rule and 
determined that it does not contain any new, or revise any existing, 
collections of information.

[[Page 7799]]

B. Regulatory Flexibility Act

    The General Counsel of FHFA certifies that this final rule will not 
have a significant economic impact on a substantial number of small 
entities because the regulation applies only to the Enterprises, which 
are not small entities for purposes of the Regulatory Flexibility Act.

C. Congressional Review Act

    In accordance with the Congressional Review Act,\16\ FHFA has 
determined that this final rule is a major rule and has verified this 
determination with the Office of Information and Regulatory Affairs of 
the OMB.
---------------------------------------------------------------------------

    \16\ See 5 U.S.C. 804(2).
---------------------------------------------------------------------------

IV. Statutory Authority

A. Federal Housing Enterprises Financial Safety and Soundness Act of 
1992 (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.'' \17\ 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.'' 
\18\
---------------------------------------------------------------------------

    \17\ 12 U.S.C. 4513(a)(1)(B)(ii).
    \18\ 12 U.S.C. 4511(b)(2).
---------------------------------------------------------------------------

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.'' \19\
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 1716(4) (emphasis added).
---------------------------------------------------------------------------

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.'' \20\
---------------------------------------------------------------------------

    \20\ Section 301(b)(4) (12 U.S.C. 1451 note) (emphasis added).
---------------------------------------------------------------------------

    As more fully explained in the NPR, 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 final 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.

List of Subjects in 12 CFR Part 1248

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

0
Accordingly, for the reasons stated in the SUPPLEMENTARY INFORMATION, 
and under the authority of 12 U.S.C. 4526, FHFA amends subchapter C of 
chapter XII of Title 12 of the Code of Federal Regulations by adding 
new part 1248 to read as follows:

PART 1248--UNIFORM MORTGAGE-BACKED SECURITIES

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

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


Sec.  1248.1  Definitions.

    The definitions below are used to define terms for purposes of this 
part:
    Align or alignment means to cause to be sufficiently similar, or 
have sufficient similarity, as to produce a conditional prepayment rate 
(CPR) divergence of less than 2 percentage points in the three-month 
CPR for a cohort, and less than 5 percentage points in the three-month 
CPR for a the fastest paying quartile of a cohort (or less than the 
prevailing percentage thresholds for alignment set by FHFA, per Sec.  
1248.5(c)).
    Cohort means all TBA-eligible securities with the same coupon, 
maturity, and loan-origination year where the combined unpaid principal 
balance of such securities issued by both Enterprises exceeds $10 
billion.
    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 generally include management decisions or actions about: 
Single-family guarantee fees; loan level price adjustments and delivery 
fee portions of single-family guarantee fees; the spread between the 
note rate on the mortgage and the pass-through coupon on the TBA-
eligible MBS; eligibility standards for sellers and servicers; 
financial and operational standards for private mortgage insurers; 
requirements related to the servicing of distressed loans that 
collateralize TBA-eligible securities; 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; 
alternatives to repurchase for representation and warranty violations; 
and other actions.
    Fastest paying quartile of a cohort means the quartile of a cohort 
that has the fastest prepayment speeds as measured by the three-month 
CPR. The quartiles shall be determined by ranking outstanding TBA-
eligible securities with the same coupon, maturity, and loan-
origination year by the three-month CPR, excluding specified pools, and 
dividing each cohort into four parts

[[Page 7800]]

such that the total unpaid principal balance of the pools included in 
each part is equal.
    Material misalignment means divergence of at least 3 percentage 
points in the three-month CPR for a cohort or at least 8 percentage 
points in the three-month CPR for a fastest paying quartile of a 
cohort, or a prolonged misalignment (as determined by FHFA), or 
divergence greater than either of the corresponding prevailing 
percentage thresholds set by FHFA, per Sec.  1248.5(c).
    Misalign or misalignment means to diverge by, or a divergence of, 2 
percentage points or more, in the three-month CPR for a cohort or 5 
percentage points or more, in the three-month CPR for a fastest paying 
quartile of a cohort (or more than either of the corresponding 
prevailing percentage thresholds set by FHFA, per Sec.  1248.5(c)).
    Mortgage-backed security or MBS means securities collateralized by 
a pool or pools of single-family mortgages.
    Specified pools means pools of mortgages backing TBA-eligible MBS 
that have a maximum loan size of $200,000, a minimum loan-to-value 
ratio at the time of loan origination of 80 percent, or a maximum FICO 
score of 700, or where all mortgages in the pool finance investor-owned 
properties or properties in the states of New York or Texas or the 
Commonwealth of Puerto Rico.
    Supers means single-class re-securitizations of UMBS.
    Three-month conditional prepayment rate (CPR3) means the annualized 
measure of prepayments for a three month interval calculated as 
follows:

CPR3t = 1 - ((1 - SMMt-2) * (1 - 
SMMt-1) * (1 - SMMt))\4\,


where t indicates the month and SMM is the single month mortality rate, 
which equals (PMTt - It - Pt)/
(UPBt - Pt), where PMTt is the actual 
payments received in the month, It is the scheduled payments 
of interest, Pt is the scheduled payments of principal, and 
UPBt is the beginning unpaid principal balance.
    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 one-to-four 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.
    (a) When aligning covered programs, policies, and practices, the 
Enterprises must consider:
    (1) The effect of the alignment on TBA-eligible securities' pricing 
and particularly on the prepayment speeds of mortgages underlying TBA-
eligible MBS.
    (2) Options that provide the greatest benefit for investors, 
lenders, and mortgage borrowers.
    (b) [Reserved]


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. The Enterprises 
shall report to FHFA on the results of any such consultation.


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) FHFA will publicly announce any temporary adjustment to the 
percentages in the definition of align, misalignment, and material 
misalignment in a timely manner.
    (3) 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.
    (4) Temporarily adjusted percentages will remain in effect until 
six months after the date on which FHFA announced the temporary 
adjustment unless within six months of that date--
    (i) FHFA announces a reversion to the previously prevailing 
percentages; or
    (ii) FHFA initiates the notice and comment process, in which case 
the temporary percentages will remain in effect until the conclusion of 
that process.
    (d) FHFA will temporarily adjust the definitions of cohort, fastest 
paying quartile of a cohort, and specified pools, if FHFA determines 
that changes in market practices or conditions dictate that an 
adjustment is appropriate.
    (1) In adjusting those definitions, FHFA will consider:
    (i) Changes in prevailing market practices related to the 
identification of specified pools;
    (ii) The prevailing interest rates environment;
    (iii) Observed relationships between pool characteristics and 
prepayment behavior of the Enterprises' TBA-eligible MBS; and
    (iv) 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) FHFA will publicly announce any temporary adjustment to the 
definitions of cohort and specified pools in a timely manner.
    (3) If adjusted definitions remain in effect for six months or 
more, FHFA will amend this part's definitions by Federal Register 
Notice, with opportunity for public comment.
    (4) Temporarily adjusted definitions will remain in place until six 
months

[[Page 7801]]

after the date on which FHFA announced the temporary adjustment unless 
within six months of that date--
    (i) FHFA announces a reversion to the previously prevailing 
definitions; or
    (ii) FHFA initiates the notice and comment process, in which case 
the temporary definitions will remain in effect until the conclusion of 
that process.


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, including proposed changes to covered programs, policies, and 
practices that were previously aligned at the direction of FHFA as 
conservator.
    (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 
borrowers and impact on the fastest paying quartile of each cohort.
    (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 three-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, if FHFA determines that there is 
misalignment, or the risk of misalignment, 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 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.
    (c) Depending on the severity and cause of any material 
misalignment, FHFA, in its discretion, may:
    (1) Require an Enterprise to terminate a program, policy, or 
practice; or
    (2) Require the competing Enterprise to implement a comparable 
program, policy, or practice.
    (d) When requiring an Enterprise to terminate a program, policy, or 
practice, or implement a comparable program, policy, or practice, FHFA 
will consider:
    (1) The effect on TBA-eligible securities pricing and particularly 
on the prepayment speeds of mortgages underlying TBA-eligible MBS; and
    (2) The costs borne by and the benefits likely to accrue to 
investors, lenders, and mortgage borrowers.


Sec.  1248.8  De minimis exception.

    FHFA may exclude from the requirements of this part covered 
programs, policies, or practices of an Enterprise as long as those 
covered programs, policies, or practices do not affect more than $5 
billion in unpaid principal balance of that Enterprises' TBA-eligible 
MBS.

    Dated: February 28, 2019.
Joseph M. Otting,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2019-03934 Filed 3-4-19; 8:45 am]
BILLING CODE 8070-01-P