The UMBS Exchange Begins

As reported, this week marks the beginning of the exchange where investors can swap out the Freddie PC with the new Uniform Mortgage Backed Security (UMBS). Specifically, the old Freddie Golds with the 45-day delay can now be exchanged with new 55 day delay UMBS. Ultimately, when fully implemented, the combination of Fannie Mae and Freddie Mac will now produce a roughly $5 trillion uniform security to investors. The expectation is that greater liquidity and standardization will benefit borrowers with better rates as a result of greater activity and pricing on the UMBS.

Freddie is making the greatest amount of change as the new UMBS 55-day delay matches the legacy Fannie MBS. They have also been spending much more time getting ready for this in order to keep any market disruption to a minimum. “Freddie Mac Gold PC investors who want the benefit of the new single security, or UMBS, should find the exchange frictionless,” said Mark Hanson, senior vice president of securitization at Freddie Mac.

We at Mortgage Media are planning to watch closely to see how much of the legacy collateral is exchanged. For some investors the 45-day delay means that they get paid sooner and long-term holders may decide to opt out. That being said, having a fungible security that is easier to trade in the future may pressure most holders to opt for exchange in order to protect their long- term flexibility. The good news here is that after years of effort, beginning under Acting Director Ed Demarco, the UMBS is on the threshold of reality.

The UMBS will be a critical component to any move toward a future state for the GSEs, whether a multi-guarantor model is created, simply keeping most of the current model, or even moving to just a single utility model.