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Consulting Corner
New MBS Disclosures
By
Andrew Davidson
The additional disclosures agreed to by Fannie Mae and Freddie Mac as a result of staff reports produced by Treasury, OFHEO and the SEC are a positive step for the mortgage market.
Over the past ten years, there has been some fragmentation of the TBA, "to be announced", or generic mortgage market. The large range of loan sizes and loan credit quality that qualifies for the Fannie Mae and Freddie Mac conventional 30 year loan programs means investors cannot assume that all loans are interchangeable. Differences in pool composition can make a substantial difference in prepayments and, consequently, in investment results.
As a result, investors have been seeking additional information about mortgage pools from a variety of sources. For example, we use the difference between weighted average gross coupon on the mortgages in a pool relative to the prevailing current coupon at the time of origination as a measure of pool characteristics. Through this mechanism we may identify alt-A, or low point loans. Investors may also consider the servicer, state concentrations and seller of pools in evaluating expected performance. The additional disclosures will serve to level the playing field, somewhat, as more pool information will be made available.
The staff report correctly identified four types of loan information:
Loan
Terms
Property
Information
Borrower
Information
Seller,
Originator and Servicer Identification
Each type of information provides additional insight into prepayments, defaults and investment performance. Loan terms are valuable for identifying the borrower's current loan. Property information provides information on the sufficiency of the collateral and may help determine if a borrower is collateral constrained, or if they have the opportunity for cash-out refinancing. Borrower information provides additional information on the range of options available to a borrower. Seller, Originator >>>
