FHFA Requests Input in Building Common GSE Security

In the first step of what is planned to be a multi-year effort, the Federal Housing Finance Agency (FHFA) has put out a request for industry input on the development of a common mortgage-backed security (MBS) designed to be issued and guaranteed by Fannie Mae or Freddie Mac.

In a proposal published Tuesday, FHFA said the so-called "single security" will draw on the existing features of the Fannie Mae MBS and the Freddie Mac Participation Certificate (PC).

Common features proposed for the security include a payment delay of 55 days, minimum pool submission amounts, and loan repurchase, substitution, and removal guidelines, among others.

By creating a single common MBS, FHFA said it hopes to reduce trading value disparities between the two GSEs and boost liquidity in the secondary market. Currently, the two issue securities separately, with Freddie Mac historically trading less favorably on the market.

In building the framework for the security, FHFA is specifically seeking input on how legacy securities would be handled, the risk of disrupting the market, and other potential industry impacts that could result. The agency is accepting comments until October 13.

The development of the single security marks a major step in FHFA's plans for its conservatorship of Fannie and Freddie, part of which involves uniting the enterprises under a common securitization platform.

In a statement, Andrew Bon Salle, EVP of single-family underwriting, pricing, and capital markets for Fannie Mae, said the company is committed to working with FHFA on transitioning to a common platform, noting that the development is likely to take some time.

Dave Lowman, EVP of single-family business at Freddie Mac, also pledged the company's support, calling FHFA's request for input "a milestone on the path towards a more competitive and resilient housing finance system."

"We share FHFA's vision of a more liquid and transparent single security that can make the secondary market even more efficient and keep homeownership within reach of America's working families," Lowman said.