FHFA extends deadline to give the market more time to weigh UMBS plan

The Federal Housing Finance Agency has extended its deadline for investor comments on a proposal aimed at better aligning pooling practices for loans in uniform mortgage-backed securities.

The new deadline is now Jan. 21, 2020, which gives market participants another month to consider and comment on the plan, which also seeks to reduce specified pool use.

The proposal the FHFA issued a request for input on would channel the majority of Fannie Mae and Freddie Mac's production into larger, multilender pools while continuing to allow about 20%-30% of issuance to be comprised of custom or specified pools. Currently, specified pools represent 30%-40% of issuance.

The plan also calls for the government-sponsored enterprises to align their policies regarding actions to be taken when prepayments on loans tied to a particular mortgage lender or servicer are unusual and have an adverse effect on MBS performance. Churning, which has been a problem for certain of Ginnie Mae's single-family MBS, could be one such cause. The proposal could result in pooling practices that are similar to some of Ginnie's, according to the FHFA.

Some investors prefer specified pools because they can be customized to include only mortgage products that generally have less prepayment risk.

While the FHFA is clearly interested in some additional tweaks to address that risk, the introduction of UMBS this year appears so far to have gone relatively well.

“It hasn’t had much impact directly on the market,” said Jake Remley, principal, senior portfolio manager and analyst at Income Research & Management. Remley has shared responsibility for securitized products and a specific focus on residential MBS.

A lot of the preconceived concerns about UMBS never materialized, said Harris Trifon, co-head of Western Asset's MBS and asset-backed securities team.

"Pre-UMBS, based on conversations we'd had with a number of market participants, people were really concerned, thinking the implications were going to be pretty massive in terms of the lack of readiness from a lot of smaller bank and money-manager type of participants. But from our perspective, it turned out to be smooth sailing," said Trifon, who also serves as the chief investment officer for Western Asset's affiliated real estate investment trust.

"There haven't been a lot of hiccups, certainly not at Western Asset but even more broadly in terms of the overall market. We haven't heard any horror stories at all, and there have been a pretty healthy amount of conversions."

Declines in rates seen recently in the market likely account more for prepayment speed concerns than the UMBS transition, he said.