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Sifma holds the final keys to UMBS launch

By Alexander Saeedy
25 Feb 2019

With the launch of the uniform MBS just months away, the merger of the markets for Fannie Mae and Freddie Mac securities – worth a combined estimated $3.7tr – is imminent, though hurdles remain before the ‘single security’ goes live and investors lose the ability to buy a specific GSE's bonds in the TBA market.

Most importantly, the “good delivery” rules that govern the TBA market will have to be amended to allow for the delivery of UMBS to investors. Amending those statutes will requiring a vote within the steering committee at the Securities Industry and Financial Markets Association (Sifma), comprised of twenty-two members that presides over the market rules.

While a vote is scheduled for March, some members on the TBA steering committee appear to be working to hold off that vote for as long as possible.

As GlobalCapital reported this month, Pimco attempted to use the nomination of Mark Calabria to justify a delay of the vote in a communication it sent out to steering committee members. The California asset manager alleged it had the right to do so on the basis of Calabria’s stated skepticism around certain GSE activities and conversations it held with Calabria in November.

Soon after, officials from the US Treasury and the US housing regulator held a conference call to allege this was untrue, demonstrating the full political force that the US government is fielding to push through the most substantial piece of housing reform in the post-crisis era.

Critics like Pimco have a laundry list of concerns with the UMBS initiative, most notable of which includes the loss of separately priced markets to allow investors to take a view on the strength of each GSE.

There are some other concerns among investors than just a lack of price-based competition, though. Some argue that with UMBS, some major investors might not be able to adequately diversify their balance sheet by issuer, as they are required to do by law under section 817(h) of the IRS code.

“Under the Single Security Initiative, the purchaser of a UMBS will not be able to identify its issuer until 48 hours prior to settlement,” KPMG analysts wrote in a report last October. “This uncertainty may jeopardize a segregated asset account’s ability to satisfy the section 817 diversification requirements.”

But sources close to the debate say this is all noise meant to throw the discussion away from the substantive direction that housing finance reform must take nearly 11 years since the GSEs were taken into conservatorship.

In order to assuage concerns that “a race to the bottom” is imminent with UMBS, the FHFA is set to publish a binding rule that would place quantitative regulatory requirements in the Federal Register on the alignment of prepayment speeds at Fannie and Freddie.

An initial comment period received a number of responses including a letter from Sifma arguing that the proposals did not go far enough, arguing that FHFA should better define how it will ensure aligned prepayment speeds, such as by specifying a limited differential of gross weighted average coupon (WAC) within a production coupon.

Some sources close to the Sifma TBA committee have said that the vote could be delayed until the final FHFA rule is published.

By Alexander Saeedy
25 Feb 2019