In Exhibit 1, we show the enhanced data loaded from Bloomberg for 4 Freddie pools. Computed tunings reflect available data; in particular, high credit score, low LTV and significant loan sizes somewhat inflate refinancing. Bloomberg is gradually expanding its downloadable information universe; currently only geographic data (4 leading states) comes back. We noticed that enhanced data can be downloaded for CMOs too, but only geographic information.

Valuation Consequence: Pay-up
Knowing the pool's specifics we can compute its fair value using either OAS or prOAS analytics. We can compare it to the matching-coupon, same-OAS (or prOAS), TBA price and determine a pay-up or, rarely, pay-down. We call the difference theoretical pay-up.

Pay-up can stem from low loan balances, high LTVs or state concentration. Contemporary MBS market offerings are full of new jargons: "LLB pay-up" (i.e. pay-up for low loan balances), "New York pay-up", etc. Pay-ups can also arise simply due to WAM and WAC difference from TBA assumptions which can lead to delivery arbitrages. For example, a broker would demand a slight pay-up (several ticks) for brand-new production of premium pools because their speed will likely be ramping up for several months. These market phenomena can be quantified using AD&Co OAS, version 5.2b.

Practical Pay-up
Market pay-ups are often smaller than theoretical ones; the reason being that many investors buy pools and place them into available-for-sale accounts. When selling the pool back to the market, they can't be assured of a fair pay-up. This market inefficiency leads to the following conservative assumption: a pool bought at a pay-up will be held for some short, investor-defined period and sold at the TBA price. What is the fair pay-up now given this adverse investment scenario? We define this measure as practical pay-up, which should be a function of the holding period, but is generally smaller than the theoretical pay-up.

How to compute the practical pay-up assuming we know the holding period, say 6 months? First, we compute theoretical pay-up assuming the regular, next-month settlement. Then, we compute theoretical pay-up using forward settlement in 7 months (our OAS system allows settling MBS as far as 12 months forward.) This is the pay-up we forfeit when selling the pool at the TBA forward price. By subtracting this forward pay-up scaled down for amortization and discounting from the next-month theoretical pay-up, we obtained the practical pay-up we seek. >>>