A progress report on the creation of a common securitization platform for private-label mortgage-backed securities has been issued, and this year’s agenda was outlined.
The Federal Housing Finance Agency proposed in October 2012 a new securitization platform and a model for a contractual and disclosure framework.
The proposal sought to create a private-label securitization platform that would be capable of eventually replacing Fannie Mae and Freddie Mac.
On Tuesday, FHFA issued an update on its plans that factor in public feedback as well as reviews by Fannie, Freddie and FHFA.
The development of a common securitization platform will enable data validation to determine whether a security conforms to required standards. Once validated, the platform will be used to register the security either with the Federal Reserve or the Depository Trust and Clearing Corp., distribute proceeds to the issuer and handle bond administration as directed by the trusts.
Master servicing functions to be handled by the platform include collecting and processing data on primary servicer loan activity and verifying that principal and interest payments are accurate. But traditional master servicer functions like loan workouts and case-by-case activities will still be handled by the issuer’s master servicer.
FHFA said that it received feedback from many respondents asking for greater clarity on ownership and governance of the platform. It will initially be co-owned by Fannie and Freddie but maintain its own chief executive officer, chairman and location. The structure will be flexible to accommodate future decisions by policymakers.
In response to several comments about access to the platform, FHFA noted that Fannie, Freddie and some servicers will have immediate access, while access for others will evolve over time.
Although initial and ongoing loan-level disclosures will be available, disclosure of updated borrower- or property-level information is not in the initial scope of the platform.
Fannie, Freddie and FHFA all agreed that a recommended life-of-loan database or data warehouse will be included.
In all, the platform will be comprised five modules including data validation, security issuance, disclosures, master servicing and bond administration.
Infrastructure components include operational data storage, industry standard data interfaces and life-of-loan data warehouse.
“In light of the importance of this initiative to the housing finance system, and reinforced by the comments received from the public, FHFA has directed the enterprises to move forward on the development of the CSP,” the regulator stated.
An initial ownership and governance structure for the platform is being established this year. Dedicated resources will be provided and an independent location site is being set up.
Also on the agenda for 2013 is the development of the modules and the initial business operational process model. In addition, the two secondary lenders will develop a multi-year plan that includes building, testing and development phases as well as changes to their own related systems and operations.
Fannie and Freddie will begin testing the platform this year and support FHFA progress reports to the public on the design, scope and functional requirements.
FHFA said it will continue alignment efforts between Fannie and Freddie, which improves efficiency and supports the future platform.
Further alignment will occur this year in the practices used with refinance solicitations to borrowers who are current, might default or will default so that investors can project cash flows and prepayment risk.
A common strategy for repurchases and substitutions is being explored by FHFA.
FHFA acknowledged several concerns raised by market participants and plans to address them this year.
One concern is broader market uncertainties that might have policy and contract ramifications like the qualified residential mortgage and the qualified mortgage; weaknesses in the representation and warranty framework used in the private-label mortgage-backed securities market; timely due diligence reviews by third parties; potential conflicts of interest between senior and subordinate bond holders; alignment of interest between trustees, servicers, investors and issuers; and disclosure of relationships between servicers and vendors.
“The combination of the two components of the common securitization infrastructure — the common securitization platform and the contractual and disclosure framework — will enable the enterprises to engage in programmatic transactions to share mortgage credit risk with the private sector and allow the contraction of the enterprises’ footprint in the market.”
