Uniform Mortgage-Backed Security, 7793-7801 [2019-03934]
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7793
Rules and Regulations
Federal Register
Vol. 84, No. 43
Tuesday, March 5, 2019
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents.
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1248
RIN 2590–AA94
Uniform Mortgage-Backed Security
Federal Housing Finance
Agency.
ACTION: Final rule.
AGENCY:
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) ToBe-Announced (TBA) eligible mortgagebacked 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 (singlefamily) 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.
SUMMARY:
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FOR FURTHER INFORMATION CONTACT:
Robert Fishman, Deputy Director,
Division of Conservatorship, (202) 649–
3527, Robert.Fishman@fhfa.gov, or
James P. Jordan, Associate General
Counsel, Office of General Counsel,
(202) 649–3075, James.Jordan@fhfa.gov.
These are not toll-free numbers. The
telephone number for the
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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 (singlefamily) 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.
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 Single1 See
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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.
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
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.
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 oneeighth 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 buyup 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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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-tovalue (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.
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
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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 passthrough 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.
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 § 1248.1 to emphasize that
its list of decisions and actions is not
exclusive.
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 § 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
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 cheapestto-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 threemonth 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 nonsystematic differences between the
prepayment rates of two Enterprises and
allow for more meaningful monitoring
of relative prepayment speeds.’’
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
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/Report
Documents/Single%20Security%20Update%20
final.pdf.
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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speeds as measured by the three-month
CPR and exclusive of specified pools.6
To avoid confusion, definitions of
both the three-month CPR and specified
pools have been added to § 1248.1.
FHFA believes that the three-month
CPR will capture the same prepayment
patterns as a rolling average of onemonth 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-tovalue 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.
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 § 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
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 § 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.
7 See, for example, Bloomberg, Waterfall Spec
Cohorts: Definitions and Syntax.
8 See 5 U.S.C. 553(b)(3)(B).
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definitions by Federal Register notice
with the opportunity for public
comment. Paragraph (d) of § 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
§ 1248.5(c) concerning adjustment of the
percentage thresholds in the definitions
of align, misalignment, and material
misalignment. Paragraph (c) of § 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.
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 loanorigination 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
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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.
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
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-SingleSecurity-Initiative-and-the-CSP_December2017.pdf.
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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 TBAeligible 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 § 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
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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 § 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 TBAeligible 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
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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.
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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
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Platform 10 as well as on the Enterprises’
Single Security web pages.11
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 § 1248.7 accordingly. New
§ 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
10 See https://www.fhfa.gov/PolicyPrograms
Research/Policy/Pages/SecuritizationInfrastructure.aspx.
11 See https://fanniemae.com/portal/funding-themarket/single-security/ and https://www.
freddiemac.com/mbs/single-security/.
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practices would be a violation of the
regulation (§ 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
Monitoring
In addition to SIFMA’s comments on
the desirability of monitoring WAC
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.
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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.
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.
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
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.
15 See https://www.sifma.org/wp-content/
uploads/2018/07/Single-Security-%E2%80%93Priority-Issues-to-be-resolved-before-launch.pdf.
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institute a committee structure or
establish a fixed list of participants.
practices that foreseeably affect cash
flows to investors.
Transparency
Potential Adverse Effects
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 § 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
§ 1248.5 thresholds at the time of any
temporary or permanent changes. FHFA
has revised § 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
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.
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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.
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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.
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
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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.’’ 19
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
16 See
5 U.S.C. 804(2).
U.S.C. 4513(a)(1)(B)(ii).
18 12 U.S.C. 4511(b)(2).
19 12 U.S.C. 1716(4) (emphasis added).
investments and improving the
distribution of investment capital
available for residential mortgage
financing.’’ 20
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.
■ 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 MORTGAGEBACKED 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.
§ 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 threemonth CPR for a the fastest paying
quartile of a cohort (or less than the
17 12
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20 Section 301(b)(4) (12 U.S.C. 1451 note)
(emphasis added).
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prevailing percentage thresholds for
alignment set by FHFA, per § 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 singlefamily 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 loanorigination year by the three-month
CPR, excluding specified pools, and
dividing each cohort into four parts
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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 § 1248.5(c).
Misalign or misalignment means to
diverge by, or a divergence of, 2
percentage points or more, in the threemonth 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
§ 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 resecuritizations 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 MortgageBacked 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-tofour unit (single-family) properties
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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.
§ 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.
§ 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]
§ 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.
§ 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;
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(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’ TBAeligible 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
E:\FR\FM\05MRR1.SGM
05MRR1
Federal Register / Vol. 84, No. 43 / Tuesday, March 5, 2019 / Rules and Regulations
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.
§ 1248.6 Covered programs, policies, and
practices.
(a) Enterprise Change Management
Processes. Each Enterprise must
establish and maintain an Enterprisewide 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.
amozie on DSK9F9SC42PROD with RULES
§ 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.
VerDate Sep<11>2014
16:03 Mar 04, 2019
Jkt 247001
(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 FHFArequired 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.
§ 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
DEPARTMENT OF TRANSPORTATION
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14 CFR Part 39
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Federal Aviation
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ACTION: Final rule; request for
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AGENCY:
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DATES: This AD becomes effective
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Agencies
[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]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
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.
-----------------------------------------------------------------------
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, Robert.Fishman@fhfa.gov,
or James P. Jordan, Associate General Counsel, Office of General
Counsel, (202) 649-3075, James.Jordan@fhfa.gov. 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.
---------------------------------------------------------------------------
\1\ See 83 FR 46889, 46892-93 (Sept. 17, 2018).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.''
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\7\ See, for example, Bloomberg, Waterfall Spec Cohorts:
Definitions and Syntax.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ See 5 U.S.C. 553(b)(3)(B).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 https://fanniemae.com/portal/funding-the-market/single-security/ and https://www.freddiemac.com/mbs/single-security/.
---------------------------------------------------------------------------
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\
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\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.
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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\
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\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\
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\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).
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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