Investors can now exchange certain existing Freddie Mac bonds for to-be-announced uniform mortgage-backed securities in preparation for the full launch of UMBS next month.
The securities that can be exchanged are 45-day payment delay Gold mortgage participation certificates and Giant PCs that may or may not be TBA eligible. Gold PCs are Freddie’s main securitization vehicle for mortgages, and Giants are larger pools of Gold PCs.
In return for these securities, Freddie Mac will give investors a one-time payment. The payment aims to compensate investors for the difference in payment delay between the securities exchanged and the UMBS mirror certificates received in return. Mirror certificates have a 55-day payment delay.
Investors can conduct the exchange using either Freddie Mac’s Dealer Direct automated portal, or TradeWeb, a technology platform used in the private market. Settlement dates for the exchanges can be scheduled as early as May 17, with a limit of 10,000 of exchanges per business day.
Freddie Mac plans to stop issuing its existing Gold PCs after May 31. Exchanges are not required and investors can opt to hold their existing securities.
The rollout of the exchanges to investors follows an earlier test Freddie Mac conducted using securities from its own portfolio.
The central goal of the mirror certificate exchanges is to bridge differences in Freddie Mac’s and Fannie Mae’s MBS payment cycles and create a uniform security without disrupting the trading of existing bonds. The creation of a single security requires more change on Freddie’s part than Fannie’s.
Fannie Mae’s issuance share of TBA-eligible securities is 59%, compared to Freddie Mac’s 41%, according to the Federal Housing Finance Agency. The FHFA calculated this ratio based on issuance between Nov. 1, 2016 and Oct. 31, 2018. Fannie Mae issued more than $940 billion in securities during this 24-month period, and Freddie Mac issued more than $650 billion.
The FHFA and its inspector general have a long-running dispute over whether the FHFA properly supervised the creation of the single-security and the common securitization platform created to host it.
The FHFA and its IG also disagree on how the costs of the project have been calculated. The IG describes it as project that cost more than $2 billion in a report released in late March. But public FHFA numbers suggest it cost closer to half that.
Half the costs the IG includes in its estimates are “integration costs,” which correspond to expenditures Freddie and Fannie would have undertaken regardless of the single security initiative, according to Robert Fishman, the deputy director of the FHFA’s division of conservatorship.
These expenses are “part of broader efforts to update and enhance their operations and technology,” Fishman said in his response to the IG’s report, which reiterates a past position the FHFA took.
The original plan for the CSP called for a platform that could be more broadly used if the GSEs became privatized. This remains a possibility. Fannie and Freddie jointly own an entity called Common Securitization Solutions that was created to build the platform.