Trade associations representing mortgage lenders and securities market participants are asking the Federal Housing Finance Agency to rethink a plan to restrict pooling options for loans sold into uniform mortgage-backed securities.
"The proposal seems to rely on the assumption that pooling loans with more attractive features (for many investors) in larger pools alongside loans with less attractive features will improve overall demand for multilender pools. While it is possible that such an outcome could occur, MBA is concerned that this assumption ignores likely responses to the proposal by both originators and investors that could dampen aggregate demand," Pete Mills, senior vice president of residential policy and member engagement at the Mortgage Bankers Association, said in a letter to FHFA Director Mark Calabria.
Chris Killian, managing director of securitization and credit markets at the Securities Industry and Financial Markets Association, also indicated in a letter sent in response to the FHFA's request for input that members fear the proposed change could deter rather than increase investor interest in UMBS.
"If the RFI's proposal were implemented, investors would see their investment choices significantly reduced," he said.
The plan the FHFA floated would route the majority of the government-sponsored enterprises' securitized production into larger multilender pools with the aim of improving liquidity and potentially facilitating future issuance of UMBS by market participants beyond Fannie Mae and Freddie Mac.
Pooling policies affect the distribution of prepayments, which increased in the past year as rates fell. An increase in prepayments can hurt the value of mortgages in the secondary market and raise rates for consumers.
In addition, the GSEs and Ginnie Mae have been concerned that some unusually fast prepayments may signal refinancing at odds with lenders' responsibility to make loans in line with borrowers' ability to repay. The GSEs' pooling proposal is based on Ginnie’s practices.
Prepayments can be mitigated either through diversification in a larger pool, or through the creation of custom pools consisting of loans with characteristics that make it unlikely for a mortgage to pay off early. Custom or specified pools are predominantly single-lender pools that investors pay up for.
While demand for UMBS is healthy, the FHFA is concerned that the rising specified pool share could affect the fungibility of securities in the main to-be-announced market. The TBA market consists primarily of loans delivered as forward trades into securities.
Specified pool activity did rise to an unprecedented high following the UMBS implementation last year, according to an analysis of SIFMA data by the Urban Institute's Housing Finance Policy Center.
"The share of specified pool trading in the agency market since the UMBS launch exceeds that during the strongest refinancing booms in recent years," authors Bob Ryan, Laurie Goodman and Jim Parrott noted in the Urban Institute report. Ryan previously was a special adviser to the FHFA, Goodman is a vice president at the institute and Parrott is a nonresident fellow.
While the increase in specified pool activity and prepayments are valid concerns, the authors of the Urban Institute report — like other commenters — don't think the FHFA's current plan is the best way to address them.
"The underlying problem is a divergence in the prepayment speeds of Fannie and Freddie's cheapest to deliver pools, which increases investor preference for specified pools and undermines TBA liquidity," the authors of the Urban Institute report said. "By focusing on the effect (the rise of specified pools) and not the cause (why investors increasingly prefer them), the FHFA may actually exacerbate the problem rather than solve it."
