According to Mark Hanson, SVP, Securitization for Freddie Mac:
“We take the loans we purchase and package them into mortgage-backed securities (MBS) bonds that offer a stream of revenue derived from borrower payments. The securities are sold globally to investors, including insurers, pension managers, money managers, REITS and foreign central banks via the TBA markets.”
“MBS are typically sold in the TBA markets on a ‘forward basis.’ That is, investors agree to buy an MBS with a specified set of characteristics. The buyer won’t know until 48 hours before settlement exactly which mortgages will be part of the security. This arrangement works because Freddie Mac and Fannie Mae are vast in scale and have consistent standards, so that investors can count on getting what they asked for.”
Liquidity Matters: The Genesis of the UMBS
Despite the success of TBA, the trading differences in Freddie Mac and Fannie Mae’s securities meant the market wasn’t as liquid or competitive as it could have been. The solution devised by Freddie Mac, Fannie Mae, and FHFA was the creation of a uniform mortgage backed security issued by both Freddie Mac and Fannie Mae. A combined TBA market where Freddie Mac UMBS and Fannie Mae UMBS are fungible and can be commingled into the same security effectively creates a larger, more liquid market.
The securities have the former structure of Fannie Mae MBS (including a 55-day delay as opposed to Freddie Mac’s 45-day delay) and the disclosures and policies that had been common to Freddie Mac securities. Investors generally do not need to know which company purchased the mortgages in the first place.
By combining these two securities markets, the U.S. housing finance system gets an exceptionally liquid TBA market ‘the second biggest bond market in the world’ where investors can efficiently buy and sell highly sought-after securities with great confidence.
The Path Forward
While the UMBS has gone live with the first settlement of UMBS transactions, there remains work to be done and opportunities to be explored.
Investors in legacy Freddie Mac 45-day payment delay Gold PCs and certain other securities will have the option to exchange those securities for 55-day UMBS for the foreseeable future, and Freddie Mac maintains two paths for them to do so, including through broker-dealers on our Dealer Direct platform and directly through the Tradeweb platform.
Common Securitization Solutions will be monitoring and adjusting the CSP over time to ensure it works without friction and to the benefit of investors and sellers. That includes not just those who buy and sell on the platform today, but potential new entrants who may be drawn to the larger, more vibrant and fungible market.
And finally, we will watch to see how much and how well the TBA market for UMBS benefits the nation’s homebuyers. That’s a key part of our mission, and we are absolutely committed to it.
**Excerpts from article by Mark Hanson, SVP, Securitization for Freddie Mac via Economic Focus**