The U.S. housing finance system changed significantly this week as the Uniform Mortgage-Backed Security (UMBS) went live, merging Freddie Mac and Fannie Mae To-Be-Announced (TBA) markets into one TBA market. While not a change you’ll see on your local news, the UMBS will have real, positive impacts on homebuyers, taxpayers, and investors from around the world, all of whom benefit from a mortgage market that is more vibrant, liquid and sustainable.
The culmination of this effort represents a remarkable achievement. We aligned and coordinated the activities of literally thousands of market participants, including investors, broker-dealers, financial market utilities, rating agencies, industry organizations and trade associations.
We passed several milestones on the way to our goal. Freddie Mac and Fannie Mae created a joint venture, Common Securitization Solutions (CSS), to build and administer a common securitization platform (CSP) on which to settle and track the new securities. The companies’ conservator, the Federal Housing Finance Agency (FHFA), established a new UMBS regulation. The self-regulatory organization for the securities industry (SIFMA), which publishes trading practices for Freddie Mac and Fannie Mae’s separate TBA markets, modified its rules for UMBS good delivery. Tax and accounting opinions were obtained from the Internal Revenue Service and Securities and Exchange Commission. Freddie Mac, meanwhile, helped investors understand how to exchange their legacy Freddie Mac Gold PC securities for the new UMBS. Moreover, all parties engaged in a massive communications campaign to make investors and other market participants aware of this effort.
In the end, it took seven years to get here. It was a long and complex effort, but it preserves the best of and even improves upon one of the greatest financial inventions of all time: The TBA market. “It’s magic.”
That’s how I’ve answered numerous questions about how the TBA markets work in the United States. Of course, it’s not magic, but what the TBA markets do is truly magical.
In essence, qualified homebuyers in the United States can go to a lender and receive a mortgage with a fixed rate for 30 years. These lenders guarantee that rate at the time buyers apply for a loan, which significantly reduces the risk that the rate will go up before the loan is approved. Because the rate is fixed, there is no risk the borrower will ever be asked to pay more, even if benchmark rates go up over the life of the mortgage. And there’s more: Homeowners can pay off their mortgages early without penalty, which means the mortgage can be refinanced at a lower interest rate when rates drop. The homebuyer can do all of this without a large down payment. In the United States, standard down payments are 20% – and Freddie Mac has options to allow first-time and low-income borrowers to put down even less, as low as 3%.
This stability and predictability, combined with payments stretched out over a 30-year period, makes homeownership more affordable and forms the cornerstone of the American Dream. It happens almost nowhere else in the world, but it does here because of the TBA markets. It works like this: Freddie Mac and Fannie Mae buy mortgages from lenders for cash, which allows them to reinvest the money immediately in new loans at current rates. Not only does this allow lenders to make more loans for more homebuyers, it also prevents the lender from being locked into long-term loans at low rates.
**excerpts from article by Mark Hanson SCV Securitization for Freddie Mac via Economic Focus
