FHFA recommits to UMBS in response to concerns about new g-fee

The Federal Housing Finance Agency is pressing ahead with a controversial guarantee fee that was proposed as part of the Enterprise Capital Regulatory Framework in 2020, but also pledged to not let it undermine single security structures, a subset of the to-be-announced securities market, as some fear it could.

“FHFA remains committed to the continued strength and resilience of the Single Security Initiative given the significant improvement in liquidity and stability that this initiative has afforded the TBA market,” newly confirmed Director Sandra Thompson said in a comment on the new g-fee.

Thompson said she wanted to maintain a dialogue with the industry and keep an eye on how the fee, set to go into effect on July 1, affects the uniform mortgage-backed security structure used in that market.

“FHFA will continue to monitor the UMBS and TBA market to ensure UMBS and the related TBA market function as intended and will continue regular engagement with stakeholders,” she said.

The 50 basis-point fee was designed to specifically address risks in UMBS related to two government-sponsored enterprises’ exposure to the other’s collateral in the combined structure.

That’s raised concerns for trade groups, which say that by positioning the fee that way, it indicates Fannie Mae and Freddie Mac’s securities aren’t fungible. The UMBS structure was created to ensure they would be.

Trade group representatives said they were hopeful the statement the FHFA issued about plans for the new g-fee meant the agency wouldn’t move forward with it if undid the uniform securities’ advantages, confirming their past positions that it could.

“If you want UMBS to succeed, you can’t have this fee,” said Michael Bright, CEO of the Structured Finance Association, in an interview Friday. 

Additional g-fees in general have to be carefully weighed as the FHFA strikes a balance between keeping its charges financially sound and fulfilling its affordable housing mission by reducing mortgage costs for low- to moderate-income buyers. However, this particular fee has additional implications for securities in the bond market that also have to be considered, Bright said.

The way the fee may cause disruption may not immediately be apparent because currently the Federal Reserve is a major buyer in the MBS market, artificially stabilizing it. However, the Fed currently is on track to unwind its position in MBS over time, and private investors are unlikely to keep treating “uniform” securities as fungible if the fact that two different counterparties exist gets categorized as a risk.

“Once the Fed gets out, you’ll have investors who have to buy bonds and all of a sudden they’re going to have to have an opinion on Fannie or Freddie because we just made it costly to be agnostic on what you want to get delivered,” Bright said.

The Mortgage Bankers Association also has taken the position since 2020 that “no risk weight” should be applied to the commingled securities exposures, Pete Mills, senior vice president of residential policy and strategic industry engagement said in an email.

Adding a risk weighting could “lead to different treatment and actions that would undermine the UMBS market,” he said, noting that the association planned to maintain a dialogue with the FHFA.

“The UMBS is a critical feature for the current and any post-conservatorship secondary market,” Mills added “We are gathering market intelligence and communicating regularly with FHFA and the GSEs to ensure a well-functioning UMBS market.” 

Some mortgage executives interpreted the FHFA’s statement as mainly an attempt to renew conversation on the UMBS-related g-fee and keep an eye on whether past concerns persist in the current markets and air different views. Some advocates of a more privatized MBS market have wanted to see some of the agency market’s advantages reduced but views on whether this would be the optimal way to accomplish that have been mixed.

“It raises attention to the issue. If people don’t care, then fine; but if people think, wow, this is maybe not the most efficient thing to do, then at least it is getting conversation started, which is a really good thing for the industry to look at,” said David Battany, executive vice president, capital markets, at Guild Mortgage, in an interview.