Fannie Mae and Freddie Mac plan to charge a new 50 basis-point fee for certain structured-finance offerings that use co-mingled agency securities as the underlying collateral.
The fee will apply to securities issued through structured-finance offerings known as Supers, and separately, real estate investment conduits (REMICs). Through these vehicles, the uniform mortgage-backed securities (UMBS) of one government-sponsored enterprise (GSE), such as Fannie Mae, are co-mingled with UMBS from the other, such as Freddie Mac, and serve as collateral for securities issued through the Supers or REMICs.
Supers are a type of structured finance transaction that include UMBS securities from both GSEs that have the same payment pass-through rate. REMICs are a type of multiclass-securities vehicle in which interest and principal payments from the underlying mortgage collateral are structured into several classes, with each class of securities having differing pass-through rates, average life, prepayment tendencies and final maturity dates. That structure allows investors to choose the class of security that best meets their investment and portfolio needs.
“The [new 50-basis point] fee is structured to apply only to the portion of the Supers or REMIC backed by the other GSE’s collateral,” Fannie Mae states in its announcement of the new policy, which becomes effective July 1. “This fee is designed to align with the cost of required capital for Fannie Mae guarantees of Freddie Mac UMBS collateral under the [new] enterprise regulatory capital framework.
“The [one-time] fee is intended to be charged at the time of settlement of the security,” Fannie Mae’s statement continues, “though we reserve the right to charge this fee post-settlement if our final view of the collateral demonstrates commingled securities are present.”
The new capital rules assign a 20% risk weight to securities issued by one GSE and included in Supers or REMICs created by the other GSE. “The charge to create Fannie Mae Supers and REMIC securities that include solely Fannie Mae collateral remains unchanged, as no additional capital charge applies to such collateral,” according to Fannie Mae’s announcement.
The Mortgage Bankers Association (MBA) in comments submitted in 2020, recommended no risk weight for such securities transactions should be put in place under the new capital framework. Adam DeSanctis, a spokesman for the MBA, explained: “Any difference between the required capital for a [GSE’s] own securities relative to those issued by another [GSE] could lead to different treatment and actions that weaken the aggregate UMBS market.”
The MBA will continue gathering information about the policy change, “and will engage in advocacy to ensure the continued smooth functioning of the UMBS market,” he said.
Freddie Mac’s announcement of the new 50 basis-point fee states that it “will be effective for applicable commingled securities issued on or after July 1, 2022,” with the commingled securities defined as a “Supers or REMIC issued by Freddie Mac or Fannie Mae (each, an enterprise) that is backed, in whole or in part, by collateral (i.e., securities) issued by the other enterprise.”
“This fee is designed to align with the cost of required capital for Fannie Mae guarantees of Freddie Mac UMBS collateral under the enterprise regulatory capital framework,” according to the Freddie Mac fee announcement.