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Prepayment Monitoring Report

Prepayment Monitoring Report - First Quarter 2018

Published: 5/22/2018

FHFA's 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the goal of improving the overall liquidity of Fannie Mae's and Freddie Mac's (the Enterprises) securities through the development of a single, common mortgage-backed security.  The new security will be called the Uniform Mortgage-Backed Security or UMBS and is designed to trade in the "To-Be-Announced" (TBA) market [1] without regard to which Enterprise is the issuer.  UMBS issued by Fannie Mae and Freddie Mac are designed to be fungible – that is, mutually interchangeable – in the TBA market.  This fungibility is central to broadening and enhancing the liquidity of the secondary mortgage market on an ongoing basis.

This report provides insight into how FHFA monitors the consistency of prepayment rates across cohorts of the Enterprises' TBA-eligible MBS.  A prepayment on a mortgage loan is the amount of principal paid in advance of the loan's scheduled payments.  Full prepayment occurs when a borrower pays off the loan ahead of the scheduled maturity, refinances the mortgage, or sells the home.  If a borrower defaults on the mortgage loan, the Enterprise will pay investors the remaining principal balance and remove the loan from the MBS.  That action has the same effect on investors as a full prepayment.  Partial prepayment occurs when a borrower pays principal in addition to the regularly scheduled payment of principal and interest.

Consistency of prepayment rates is important to the success of UMBS and to the efficiency and liquidity of the secondary mortgage market.  Some industry stakeholders have expressed concern that the rates of prepayment of the Enterprises' securities might materially diverge and undermine their fungibility.  FHFA has taken a number of steps to promote the continued consistency of prepayment rates of Fannie Mae- and Freddie Mac-issued mortgage-backed securities (MBS).  This quarterly report is part of that commitment and provides market participants additional transparency into the data FHFA receives and reviews on a monthly basis and into FHFA's uses of that data.

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[1] The TBA market is a forward market for certain mortgage-backed securities, including those issued by Fannie Mae and Freddie Mac.

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