FHFA: Progress Report on Fannie/Freddie Replacement

by devteam May 1st, 2013 | Share

The Federal Housing FinancernAgency (FHFA) has released a progress report on the common securitizationrninfrastructure (CSI) being constructed as a replacement for the existingrnprocesses used by the government sponsored enterprises (GSEs) Freddie Mac andrnFannie Mae.  The updates are discussed asrnthey relate to the common securitization platform (CSP) which is largely arntechnology project and the contractual and disclosure framework (CDF) beingrndeveloped to enhance transparency and investor protections in residentialrnmortgage-backed securities (RMBS).</p

The proposed new infrastructurernwas set forth in a white paper issued in October 2012 by FHFA and publicrncomment was invited.  A link to thatrnpaper is available here.</p

FHFA said it has receivedrnpublic comment on the paper from a broad cross-section of industry participantsrnand other stakeholders and the proposed technology upgrade aspects of the CSPrnand the specific functions were generally supported.  Many comments related to the scope ofrnfunctionality with the most significant responses seen in fivernareas.  FHFA and the GSEs have beenrndeveloping a design, scope, and functional requirements for the CSP and haverndeveloped a prototype which will incorporate the following responses.</p<ul class="unIndentedList"

  • <strongOwnership/governance. The current plan is to initially structurernthe CSP as co-owned by the GSEs while the resolution of the conservatorships isrndecided. The venture will have a CEO andrnChairman of the Board who are independent from the GSEs and located separatelyrnfrom them and will be overseen by FHFA.rnThe design is deliberately flexible so that the long-term ownershiprnstructure may be adjusted as housing finance reform progresses and FHFA plansrnto put a formal structure to allow for ongoing industry input in place.</li
  • <strongBuild. The GSEs and FHFA are using industry-standardrndata definitions, protocols, and technology wherever possible; for example byrnleveraging MISMO initiatives and the Uniform Mortgage Data Program. Existing industry software will be utilizedrnto the extent feasible.</li
  • <strongAccess. Several respondents either requested clarityrnon or specifically recommended that certain market participants have access tornthe CSP. Some of these participantsrn(servicers and the GSEs) will have immediate access; others such as lenders,rnmortgage insurers, and security issuers will have access as the CSP evolvesrnover time and the long term goal remains broad, open access.</li
  • <strongDisclosures: Respondents supported standardized,rnloan-level disclosures and several asked for borrower or property-levelrninformation. The CSP functionality doesrninclude both initial and on-going loan-level disclosures; updated borrower orrnproperty-level information is not in the scope of the initial phase but therndesign will be flexible enough to allow their incorporation in a future release.</li
  • <strongFunctionality.<strongIn response to several specific functions proposed by respondents FHFArnhas taken the following actions: </li</ul

    a.   “Life-of-loan” Database or Data Warehouse. rn FHFA and the GSEs agree that thernability of the CSP to track activity over the life of the loan would bernextremely valuable and this function will be included. </p

    b.   Loan Acquisition Data.  FHFA and the GSEs concur with severalrnrespondents that having the CSP undertake uniform validation of loan acquisitionrndata is an important benefit and are assessing how and when to incorporate it into thernCSP. </p

    c.   Collateral Management Activities and Custodial Functions. rnThe ability of the CSP to perform several collateral management andrncustodial functions (tracking, verifying and reporting collateral values;rndocument custody, assignment, etc.) would be beneficial.  The initial phase of the CSP will include therndata necessary for collateral management and the design will be flexible enoughrnto incorporate the function in the future. rnCustodial functionality will not be included initially although the CSPrnwill track the custodian for each loan. </p

    The current scopernforrnthe CSP is comprised of thernfollowing modules and infrastructure components:</p

    Modules</p<ul class="unIndentedList"<liData Validation</li<liSecurity Issuance</li<liDisclosures</li<liMaster Servicing</li<liBond Administration</li</ul

    Infrastructurerncomponents:</p<ul class="unIndentedList"<liOperational data store</li<liIndustry standardrndatarninterfaces</li<liLife ofrnloan data warehouse</li</ul

    FHFA has directed the GSEs to movernforward on the development of the CSP. rnThe next steps are to:</p<ul class="unIndentedList"<liEstablishrninitial ownership and governance structure, assign dedicated resources andrnlocate a physical site for the CSP Team.</li<liDeveloprnthe design, score and functions requirements for the modules and the initialrnbusiness operational process model.</li<liDeveloprna multi-year plan</li<liDeveloprnand begin testing the CSP</li<liSupportrnFHFA progress reports to the public and update documents based on feedback.</li</ul

    Feedback on thernCDF indicated that GSE alignment activities were generally viewed as anrnopportunity to create valuable efficiencies for the market and there wasrnfavorable response to efforts already underway to do so.  </p

    The following are specific areas thatrnFHFA plans to explore during 2013 as potential for GSE alignment. </p<ul class="unIndentedList"<liFHFA will review Enterprise practices and determine the feasibility of aligning their borrower refinance solicitationrnguidelines including those for borrowers who are current on their mortgages,rnthose beginning to show an increased potential for default and othersrnwho may be at risk of default. This mayrnallow investors to better gauge the timing of cash flows and prepared risk ofrnsecurities. Borrowers,rnin turn, will benefit from more effective,rndeliberate, and structuredrncontact from servicers.</li<liFHFA will explore the developmentrnof a common GSE strategy for mortgage repurchase and substitutionrnincluding conditions under which they are allowed, who is responsible, and therntiming of collection proceeds related to repurchases. </li<liFHFArnwill continue to evaluate the representation and warrantee needs of investorsrnthat assume credit risk from transactions in accordance with FHFA scorecardrngoals for 2013.</li<liFHFA will continue to review opportunities to create morernstandard parameters for creating loan pools and will also explore thernfeasibility of alignment of document custody policies, securities trustrndocuments and servicer performance monitoring.</li</ul

    Regarding non or partially guaranteedrnRMBS transactions, industry feedback suggested that any new credit structuresrnwill have some of their own unique contractual needs and differences.   FHFA and the GSEs will evaluate opportunitiesrnto develop standards for credit risk transfer activities that address some ofrnthe issues raised including;  </p<ul class="unIndentedList"<liBroaderrnmarket regulatory requirements and uncertainties</li<liWeaknessesrnin the Representation and Warranty Framework used in the private label MBSrnmarket.</li<liThernneed for more robust and timely due diligence.</li<liPotentialrnconflicts of interest, particularly between senior and subordinate bondrnholders.</li<liFullerrndisclosures including ongoing servicing disclosures and any expansion of datarndisclosures at a pool level that could unintentionally create market bifurcationrnin the formation of pools.</li<liChangesrnin GSE guides, especially the servicing guides that could put investors atrnrisk.</li</ul

    FHFA’s plan is for thernGSEs to undertake the followingrnCDF related steps in 2013. </p<ul class="unIndentedList"<liContinue the development of the CDF to meet the requirements for investors in mortgagernsecurities and creditrnrisk:</li<liIdentify and develop standards in data disclosure andrnSeller/Servicer contracts.</li<liDevelop and execute work plans forrnalignment activities between the Enterprises withrnregard to common standards and creation of legal/contractual documents to facilitaternvaried credit riskrntransfer transactions</li<liEngage with the publicrnin a variety of forums to seek feedback and incorporaternrevisions and support FHFArnprogress reports to thernpublic.</li

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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