FAQ: The Single Security Initiative

Are you following the joint Fannie Mae/Freddie Mac Single Security Initiative? The following are answers to frequently asked questions surrounding this issue, answered by Clearwater’s market and data experts.

What is the Single Security Initiative?

The Federal Housing Finance Agency’s (FHFA) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac set the goal of developing a single, common enterprise mortgage-backed security. This is known as the Single Security or the Uniform Mortgage-Backed Security (UMBS). This security is being developed by Fannie Mae and Freddie Mac (the Enterprise) under the FHFA’s guidance as part of the broader creation of the Common Securitization Platform. The UMBS will be issued and administered by Fannie Mae and Freddie Mac’s joint venture, Common Securitization Solutions.

The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the Enterprises), under the direction of FHFA, to develop a common mortgage-backed security. The objective is to combine the separate TBA markets of the Enterprises – currently $2.4 Trillion for Fannie Mae and $1.1 Trillion for Freddie Mac – into one larger, more liquid market. The Single Security Initiative will go live on June 3, 2019.

— Freddie Mac*

The Single Security is a joint initiative between Fannie Mae and Freddie Mac (the Enterprises), under the direction of FHFA, to develop a single mortgage-backed security that will be issued by the Enterprises to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. The Enterprises will align key components of Fannie Mae’s mortgage-backed securities (MBS) and Freddie Mac’s participation certificates (PCs). The goal is to bring additional liquidity and fungibility to the “To-Be-Announced” (TBA) market and to reduce or eliminate the trading disparities that exist today between the Enterprises’ TBA securities.

— Fannie Mae**

How will Clearwater users be affected?

The overall impact to Clearwater clients is expected to be minor. Investors will have the option to exchange legacy Freddie Mac PCs for comparable UMBS, which will be backed by the same mortgage loans. Since the exchange is optional, you will see no change to your portfolio unless you choose to exchange legacy securities for the new UMBS mirror securities. If you choose to initiate the exchange, please note the following:

  • All exchange-eligible 45-day PCs will be mirrored by 55-day UMBS and non-TBA 55-day securities.
  • You will receive a one-time payment to compensate for the change to the new payment delay.***
  • The mirror security will have a different pool number, issue date, payment delay, and CUSIP.

The exchange for UMBS mirror securities can be conducted in one of two ways:***

  1. Dealer Facilitated: Authorized exchange dealers submit request through Freddie Mac’s Dealer Direct portal. This option will stay open for the foreseeable future.
  2. Direct to Freddie Mac: Investors exchange directly with Freddie Mac through Tradeweb. This can be done either through a direct order on Tradeweb or through an integration through your order management system. This option is expected to be available for three to five years.

What is Clearwater doing to prepare for these changes?

Clearwater Analytics has a multi-disciplinary team monitoring the Single Security Initiative and its possible effects on users and the services we provide. We are modeling the UMBS to mirror securities in our system in advance of trading and are pulling data from our third-party data providers to ensure there will be no unexpected issues when the markets go live.

  • Of the 70,000 securities identified so far by Freddie Mac as eligible for exchange, 8,742 are currently held by Clearwater clients and modeled within the system.
  • As we move toward the date when the exchanges go live, Clearwater will continue to test and review data sets provided by Freddie Mac and Fannie Mae.
  • Clearwater will communicate with clients about securities they hold that may be eligible for exchange.

How can I be certain of the ongoing quality of my data?

While Clearwater expects a considerable increase in transactions as the exchanges go live, we do not foresee any disruption in our ability to provide timely and accurate reporting on these new securities.

What are the tax implications of this change?

The following information is for information purposes only and is not intended to be tax advice. For additional information about how this could affect your taxes, contact a certified tax professional.

In August 2018, the IRS announced Revenue Ruling 2018-24, which provides guidance on the tax treatment of this exchange. The revenue ruling states, “The Conversion will not constitute a taxable exchange of property for purposes of section 1001.”

What are the key components of the Single Security Initiative?

The following information is found in FHFA Proposed Rule: Uniform Mortgage-Backed Security, September 17, 2018. “The Enterprise” refers to Freddie Mac and Fannie Mae.

(1) Each Enterprise will 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. 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.

(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.

What is the timeline for this project?

Q4 2018

Freddie Mac will start offering a schedule of payment rates for the 10-day delay compensation payment by the end of 2018.

Q1 2019

UMBS forward trading begins. As of this writing, the forward trading date has not been set.

May 7, 2019

Exchange of Freddie Mac Gold PCs will open for booking.

May 17, 2019

First exchange settlement and float compensation payment.

June 3, 2019

Indices show UMBS/Supers and the Enterprises will begin issuing new UMBS securities.

June 6, 2019

The first Supers/REMIC FRB will be broadcast.

How can I find more information?

Clearwater will continue to monitor the Single Security Initiative and will update our clients as June 3, 2019 approaches. Be sure to contact your account manager with any questions.

Additional Resources

* Freddie Mac Single Security website

** Fannie Mae Single Security website

FHFA Single Security website

Joint FAQ from Freddie Mac, Fannie Mae, and the FHFA (downloadable PDF)

***Single Security Initiative Market Adoption Playbook (downloadable PDF)

 

This communication is for general information purposes only and should not be considered a solicitation, recommendation, offer, or investment advice to sell, buy, hold or exchange any security or to take any action, nor should it be considered investment advice fiduciary activity. No warranties are made by any entity in relation to any information provided, including warranties regarding completeness or accuracy, and all information provided here is subject to change without notice.
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The Clearwater team is made up of a wide range of investment accounting experts, who attend industry events, work closely with industry leaders, monitor regulatory guidance, and gather feedback from Clearwater clients.