July 10, 2018

Robert Ryan
Acting Deputy Director
Division of Conservatorship
Federal Housing Finance Agency
Office of Strategic Initiatives
400 7th Street, S.W.,
Washington, DC 20024

Re: Single Security – Priority Issues to be resolved before launch

SIFMA’s Goals

The preservation and enhancement of the strong liquidity of the TBA market that has developed over the past 40 years is a shared and paramount goal that is embraced by all stakeholders including lenders, investors, and regulators. Given the importance of the TBA market, the successful launch of the Uniform Mortgage-Backed Security (“UMBS”) requires a communal effort that must be owned by all mortgage market participants. SIFMA1 wants to ensure that there is a successful outcome for the TBA market when the UMBS is introduced. Various official sector policymakers and stakeholders have suggested that it would be useful understand the most important “open issues” related to the implementation of the single security. Accordingly, we have set forth in this letter the most significant open issues and recommendations to address them.2

Many market participants have expressed concerns regarding the level of uncertainty surrounding many key issues that need to be addressed prior to the successful launch of the UMBS. In order to ensure the successful launch, there are a number of open issues that need to be resolved regarding alignment, tax/regulatory treatment and the orderly exchange process. Satisfactorily addressing these issues in a timely manner will help to ensure a successful “on time” launch.

Two of the primary metrics of success for the new UMBS will be relatively consistent prepayment performance across Fannie Mae and Freddie Mac issued UMBS and improved overall liquidity in the new TBA contract. Achieving these metrics is critical in garnering and maintaining confidence in the UMBS dealer and investor community that liquidity will be sufficient to facilitate large scale trading activity in a single TBA contract. An implementation of the UMBS which results in excessive stipulation, where one GSE issuer trades with a pay up, is contrary to the stated policy objectives and something that all parties want to avoid.

Moreover, the interests of investors and homeowners are fully aligned. A liquid market with consistent security performance helps provide stability for mortgage lending and access to credit for homeowners. The recent example of GNMA’s efforts to mitigate performance issues in some of its securities illustrates how homeowners’ and investors’ interests can be aligned in a successful outcome. Security performance improved, liquidity improved, and the rates to homeowners declined. In order to insure the successful implementation and operation of the UMBS, the following open issues need to be addressed and resolved:

1. Alignment Process and Transparency: The concerns raised about the framework for monitoring activity that can affect prepayments, and transparency into the process for fostering alignment and promptly remediating divergent behavior, undermine market confidence.

2. Roadblocks for Investor Readiness: A number of critical tax and regulatory issues remain in flux, which impedes discussions with end investors and custodian readiness for the UMBS.

3. Finalization of the Exchange Process: The exchange process also remains in flux. Exploration of alternatives to the proposed approach must be considered.

4. Gold PC Exchange liquidity and conversion issues: Holders of Golds should be provided a perpetual free and frictionless process to convert to UMBS. Additional measures  should be considered to maximize liquidity post-launch.

5. Investor Awareness: More needs to be done to ensure there is a clear articulation of the new policies and practices to insure a broad global understanding of the proposed changes to the market.

These issues should be addressed in a timely manner to ensure that the timeline specified by FHFA is readily achievable.

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1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 Please note that while this letter addresses some of the most significant issues, it does not address all of the issues related to the launch of the UMBS.