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Prepayment Monitoring Report

Prepayment Monitoring Report - Third Quarter 2019

Published: 12/9/2019

On June 3, 2019, Fannie Mae and Freddie Mac began issuing a new common mortgage-backed security, known as the Uniform Mortgage-Backed Securities or UMBS, through their jointly developed Common Securitization Platform, bringing to fruition important elements of FHFA's 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac.  On March 12, 2019 forward trading of UMBS began in the “To-Be-Announced" (TBA) market [1], with first settlements of the UMBS trades coinciding with their initial issuance by the Enterprises on June 3, 2019.

FHFA encouraged Fannie Mae and Freddie Mac to develop this new security to broaden and enhance liquidity in the secondary market for residential mortgages and to reduce costs to taxpayers.[2]  To address those goals, UMBS issued by Fannie Mae and Freddie Mac trade in the TBA market without regard to which Enterprise is the issuer, effectively merging the formerly separate markets for mortgage-backed securities issued by each Enterprise.

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 provides market participants additional transparency into a sample of the data FHFA receives and reviews on a monthly basis.

Ex post monitoring of prepayment rates is part of a broader effort to assure investors that cash flows from UMBS will be similar regardless of which Enterprise is the issuer.  This report provides insight into how FHFA monitors the consistency of prepayment rates across cohorts of the Enterprises' TBA-eligible MBS,[3] where a cohort consists of those Enterprise TBA-eligible securities with the same coupon, maturity, and loan-origination year and total combined issuance across the Enterprises exceeds $10 billion.  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.  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.

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

[2] See An Update on the Structure of the Single Security, May 2015, p. 4

[3] To avoid double counting, only first-level securitizations are included in the analysis. Second-level securitizations (Megas, Giants, and Supers) are excluded, with the exception of fastest quartile analyses in which case multi-lender second-level securitizations are included.   
 

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