Freddie Mac paves the way for UMBS with mirror certificate exchange

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Freddie Mac exchanged existing bonds from its portfolio for mirror certificates for the first time, completing a key test of a transaction that is central to the creation of a uniform mortgage-backed security.

There will be more test exchanges in April ahead of the full implementation of the single security, which is designed to improve secondary market pricing of mortgages.

The UMBS has received clearance from a group that establishes securities market guidelines, and it is on track to go into full implementation on June 3. Among other things, lenders and servicers will have to observe moratoria on certain mortgage servicing rights trades during the transition period.

In the completed mirror certificate transactions, Freddie exchanged certain eligible 45-day payment delay Gold Mortgage Participation Certificates and Giant PCs from its portfolio for mirror certificates that have a 55-day payment delay.

Freddie plans to open up some of its April exchanges to other holders of its bonds. The GSE will offer exchanges to the full market starting on May 7, in preparation for the full rollout of the UMBS in June.

Mirror certificate exchanges are designed to achieve one central goal of the transition to a single security, which is to bridge differences in Fannie Mae and Freddie Mac's MBS payment cycles and combine their securities without disrupting the trading of existing bonds.

The creation of the UMBS requires more change on Freddie's part than Fannie's. Freddie is the smaller of the two issuers, but its share of GSE MBS issuance has been higher in recent years.

Gold PCs are guaranteed, securitized mortgages backed by the loans lenders sell to Freddie, and the cornerstone of Freddie's MBS program. Giants are a group of PCs with similar features consolidated into larger pools. Investors may prefer Giants because they can be more efficient to manage.

Freddie Mac will no longer allow delivery Gold PCs and Giants into the market after May 31.

Loans sold into the GSEs' main to-be-announced or forward delivery MBS market fund a considerable portion of home mortgages in the United States. In this market, commitments are made prior to the actual delivery.

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GSEs MBS MSR Secondary market Freddie Mac Fannie Mae