SIFMA Comments on Uniform Mortgage-Backed Security Proposed Rule

In acomment letterfiled recently with the Federal Housing Finance Agency on potential rulemaking on the implementation of the Uniform Mortgage-Backed Security (UMBS), SIFMA offers suggestions to strengthen three aspects of the proposed rulemaking for the benefit of investors and mortgage borrowers.

SIFMA supports the codification of the alignment activities that have taken place in recent years. We believe targeted adjustments to the rule are necessary to ensure the definition of alignment is focused on the factors which drive market pricing, and that FHFA should outline a wide menu of remedies for misalignment that reflect the breadth of its existing authority, in order to provide confidence to investors that not only will misalignment be corrected, but that the GSEs will have little incentive to take actions that cause misalignment., said Christopher Killian, SIFMA managing director for securitization and corporate credit markets. Taking these important steps will benefit the launch of the single security and help realize our shared goals of the enhancement of liquidity and the continuation of benefits to borrowers that the TBA market currently provides.

SIFMA believes the success of the UMBS will be in part determined by how well GSE MBS performance is aligned, and how strongly the market believes it will remain aligned. It supports steps the FHFA has taken to make more permanent the changes that have been made at the GSEs in this vein.

SIFMA is encouraging the FHFA to enhance the definition of alignment in two ways. First, to be effective in protecting the UMBS TBA market, the definition of alignment must extend to the subset of MBS that impacts TBA pricing. Second, alignment must also prevent material deviations in the key mortgage pool characteristics that drive future prepayment activity. Of these, the gross weighted average coupon (WAC) is the most important characteristic that can and should be aligned between the two GSEs production.

Finally, with recognition that the FHFAs regulatory powers are broad and extend beyond the remedies for misalignment laid out in the proposed rulemaking, SIFMA believes the final rule should reference stronger practical remedies for misalignment. Doing so would provide market participants with greater comfort that alignment will be maintained over time, and that any instance of misalignment will be short-lived and appropriately addressed. This will in turn improve investor confidence and further improve the likelihood that the UMBS program will be successful.