UMBS Pooling Practices

UMBS Pooling Practices

In the securitization process, the choice of which loans to group together as collateral for an individual security is called pooling. The Federal Housing Finance Agency (FHFA) is seeking public input on Fannie Mae's and Freddie Mac's (the Enterprises') pooling practices as they relate to the formation of “To-Be-Announced” (TBA)-eligible Uniform Mortgage-Backed Securities (UMBS)1 regardless of whether the pooling is done by an Enterprise for loans acquired through the cash window/whole loan purchase conduit or by a seller for loans acquired through a guarantor swap transaction. 2 Pooling policies are important because they may affect the distribution of prepayments (for example, from mortgage refinances, loan payoffs, or other causes), which, in turn, may affect the value of mortgage-backed securities (MBS) to investors and, therefore, mortgage interest rates to consumers. Differences across the Enterprises in their policies for the formation of larger multi-lender pools, single-lender pools, smaller pools, and specified pools3 can lead to differences in the cash flows, pricing, and performance of their MBS, with potentially adverse consequences for the fungibility of UMBS.

FHFA is also seeking public input about other policies and practices that might affect UMBS fungibility, including the Enterprises' oversight of seller/servicer4 refinance policies and their monitoring of seller/servicer-specific UMBS prepayment speeds. Enterprise requirements related to - and oversight of - seller/servicer refinance practices is important to ensure the consistency and alignment of UMBS cash flows. Similarly, Enterprise policies and practices with respect to monitoring of seller/servicer-specific prepayment speeds can affect the likelihood and magnitude of misalignment of prepayments across their UMBS. These practices also can affect investors, lenders, taxpayers, and consumers.

Finally, this Request for Input includes a proposal for Enterprise pooling practices that could further enhance UMBS fungibility. The proposal would require the Enterprises to channel the vast majority of their non-specified pool production into larger, multi-lender pools in order to reduce the variability in cash flows to investors.

FHFA will consider the public input solicited here in determining what actions may be appropriate with respect to alignment of Enterprise pooling policies. In particular, the requested input will help FHFA determine whether further action or alignment is necessary to ensure reasonably consistent cash flows and continued fungibility of the Enterprises' UMBS and to understand where further alignment might benefit investors, lenders, borrowers, and taxpayers. In addition, FHFA is interested in understanding if having more aligned pooling practices could facilitate the issuance of UMBS by market participants beyond Fannie Mae and Freddie Mac.