Federal regulators on Monday announced a major new mortgage-backed securities program that they believe should save taxpayers money.
The new program, called the Uniform Mortgage-Backed Security (UMBS), is a product of the Federal Housing Finance Agency (FHFA). It will unify two important mortgage-backed securities issued by Fannie Mae and Freddie Mac, the nation’s two largest guarantors of housing securities products, which are then purchased by investors and re-sold (traded).
In this case, the program has to do with a type of mortgage-backed security known as a TBA, which is short for “to be announced.” Essentially, a TBA is an agreement to either buy or sell a mortgage-back security at some future date. People (or entities) trading TBAs agree on certain aspects of the deal, such as price, but don’t initially specify which actual mortgage-backed securities will be bundled in the deal.
In the past, Fannie Mae and Freddie Mac ran separate TBA markets, which were worth $2.4 trillion and $1.1 trillion, respectively. However, regulators wanted to bring those two markets together in hopes of pulling up the value of Freddie Mac’s market, and that’s precisely what the new UMBS aims to achieve.
“The goal of this project, this initiative, has been to increase the overall liquidity of the [mortgage-backed security] market by bringing two TBA’s together,” FHFA Deputy Director Robert Fishman further explained Monday during a call with reporters.
Fishman also said that bringing these two markets together should reduce pricing disparities in the TBA markets and, ultimately, “save taxpayer money” via accounting efficiencies. Fishman declined to say during the call just exactly how much money the new program should save, though Housing Wire, citing previous comments from FHFA, reported that it could be between $400 million to $600 million per year.
Perhaps most importantly for brokers, agents and their clients, Fannie Mae and Freddie Mac will use the new UMBS to finance fixed-rate mortgages for residential properties that have between one and four units.
Previously, when a borrower/homeowner paid their monthly mortgage, Freddie Mac paid back the investors who bought into a corresponding security backed by said mortgage, after a delay of 45 days. However, the new UMBS will pay back investors in 55 days, which corresponds with Fannie Mae’s current securities payment timeline.
Investors still holding old Freddie Mac 45-day securities certificates (known as Fixed-Rate Gold PCs) will receive an extra “fair value” compensation for the 10-day-delay when they exchange them for a new 55-day payout UMBS, according to documentation posted online by Fannie Mae.
The hope is that by syncing up the payment timelines for investors in both Freddie and Fannie securities, and issuing one new type of security, it will result in a higher average trading volume for all mortgage-backed securities from these entities, in a market where Fannie Mae has historically dominated since about mid-2011, as Bloomberg reports.
If all goes according to plan, it could mean more money flowing into the secondary mortgage market and ultimately, more home financing options at lower interest rates for prospective buyers. But critics worry the plan to combine the two types of securities could result in them all being valued lower to investors, which would mean higher interest rates for borrowers.
The move to combine the TBA markets of Fannie Mae and Freddie Mac comes amid a larger push to broadly reform the two entities. Perhaps most notably to real estate practitioners, the National Association of Realtors floated the idea in February of entirely replacing Fannie and Freddie with a private organization that could be regulated like a utility.
Though relatively obscure among most consumers, the project to create the UMBS has been in the works since at least 2012. Officials have already been prepping investors for the launch of the combined TBA market for months, and during Monday’s phone call Freddie Mac senior vice president Mark Hanson said that “all signs are quite positive at this stage in the market.”
“We think the market is ready and now it’s just a matter of implementing and getting back to the new normal,” Hanson added.
Renee Schultz, a senior vice president at Fannie Mae, also said during the call that the new UMBS is a “major milestone for our industry.”
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