A fundamental and substantial change is coming to the bonds issued by Fannie Mae and Freddie Mac and the way those bonds are issued, but no one seems quite sure when it’s going to happen.
When Federal Housing Finance Agency Director Mel Watt made his initial public speech in May, he said that adjusting the way Fannie and Freddie securitize mortgages was one of the FHFA's key goals.
During his speech, Watt said that the FHFA would focus on making sure that the “Common Securitization Platform” worked for Fannie and Freddie.
“After extensive discussion within FHFA and with the Enterprises, we have clarified that the agency’s top objective for the Common Securitization Platform is to make sure that it works for the benefit of Fannie Mae and Freddie Mac,” Watt said at the time.
“Over the last four months, we have identified the risks involved in transitioning to a common securitization platform and reviewed how to manage those risks, Watt continued. “We found that, because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time.”
Watt echoed that point in his exclusive interview in the August issue of HousingWire Magazine. In that interview, Watt said that increasing liquidity in the housing market was one of his main goals and that a common securitization between the GSEs could be a mechanism to bring more private capital into the market.
“We turned a corner, not because we didn’t think the old strategic plan was an important plan for when it was implemented,” Watt said in the interview. “It is to recognize that the primary role of Fannie and Freddie is no longer to stop the bleeding in mortgages, but rather in now providing a liquid position to the housing finance market.”
And given the GSEs' substantial place in the securitization market, the CSP has been a popular topic of discussion the second day of ABS East, the massive industry conference which focuses on the securitization market.
The subject was discussed in a morning general session that featured Bob Ryan, special advisor to Watt; Michael Stegman, counselor to the Secretary of the U.S. Department of the Treasury for Housing Finance Policy; Stephen Kudenholdt, co-chair of U.S. capital markets practice, Dentons; Rui Pererira, managing director at Fitch Ratings; Richard Johns, executive director of Structured Finance Industry Group; and Fred Matera, managing director of Redwood Trust.
During that session, Ryan said that building the CSP is a “massive undertaking.”
Much of the discussion in the morning session was focused on trying to bring private capital into the market. “There are very important things that the FHFA is doing,” Stegman said. “We have to work on all fronts, including housing finance reform.”
The CSP was front and center during an afternoon session called, “The Common Securitization Platform: It’s Not If but When.”
The panel was moderated by Faith Schwartz, senior vice president of government solutions at Corelogic and featured Stephen Clinton, senior vice president of strategic initiatives at Freddie Mac; Robert Fishman, senior associate director at the Federal Housing Finance Agency; Ned Myers, senior vice president at Lewtan; Richard Sorkin, senior vice president of single-family pricing strategy and structured transactions at Fannie Mae; and Jeana Curro, director of ABS/MBS strategy at RBS.
One of the main topics was an update on the progress of the development of the CSP.
“The CSP is a very important goal of the enterprises,” Fishman said. “We have made real progress on the software build, but development will continue for quite a while. This is not a done deal.”
Sorkin said that the development of the CSP and the single security has been in the works for years. “This hasn’t been easy,” he said. “We’ve spent years on this development. The challenge is going to be the integration. It’s going to take a couple of years to get this done. It won’t be easy but it is doable.”
Freddie’s Clinton expressed similar sentiments. “It’s a big project, but we feel that we will be able to get it done,” he said. “The testing of this will be super high and super intense.”
One concern of the some of the panel’s attendees was the inclusion of legacy RMBS into the new CSP as “re-securitizations,” which are second-level securitizations of the single securities issued by either GSE.
“Those legacies are very important,” Sorkin said.
“We want legacy securities to be able to be included in the single security,” Fishman said.
While the final form for the CSP is yet to be determined, the FHFA published its proposal for how it could work in August.
According to the FHFA, the new security would “would encompass many of the pooling features of the current Fannie Mae Mortgage Backed Security and most of the disclosure framework of the current Freddie Mac Participation Certificate.”
Each single security would be issued and guaranteed by either Fannie Mae or Freddie Mac. Under the new plan, the single security would be a first-level securitization containing underlying mortgage loans that were acquired 100% by Fannie or 100% by Freddie.
The Single Security would have several features that are “common” in the current market, including:
- A payment delay of 55 days
- Pooling prefixes
- Mortgage coupon pooling requirements
- Minimum pool submission amounts
- General loan requirements such as first lien position, good title, and non-delinquent status
- Seasoning requirements
- Loan repurchase, substitution and removal guidelines
When it made the announcement, the FHFA said that the CSP should help to bring “maximum liquidity” to the market.
While no one knows for sure just how the CSP will work or when it’s coming, Curro said that it should indeed bring capital into the market. “Our view is that the CSP will absolutely improve the liquidity of the market,” she said.
