Uncategorized
FHFA’s dramatic solution to a modest problem
admin | November 15, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The recent FHFA proposal to change the Fannie Mae and Freddie Mac pooling process would require the enterprises to dictate exactly which loans could be placed in single-issuer pools. This would likely have a dramatic and detrimental effect on investors and originators of conventional MBS. However, only a small portion of generic single-issuer pools prepay worse than the large monthly 30-year multiple-issuer pools, and it is unlikely that these single-issuer pools could have a large effect on TBA pricing. Such a major change to pooling does not seem warranted.
Who issues generic single-issuer pools?
Most single-issuer pools contain loans with better prepayment characteristics such as low loan balance. These pools command a pay-up over the TBA price, and originators can only capture that pay-up by creating their own pools. But a generic single-issuer pool that doesn’t appear to have beneficial loan characteristics often commands a premium as well, since that lender’s loans likely have proven to prepay better than average.
A lender with poor prepayment performance won’t be able to command a pay-up for their loans and therefore will usually place loans into a multiple-issuer pool. However, the GSEs can limit how many loans some lenders can place into multiple-issuer pools, forcing them to create single-issuer pools that may have worse convexity that the multiple-issuer pools.
The majority of generic single-issuer pools are created by slower-than-average servicers (Exhibit 1). Freddie Mac in particular issues very few single-issuer pools by faster servicers, likely the result of efforts to improve prepayment performance leading into UMBS. Freddie Mac and the FHFA had been told for years that one reason the Gold TBA traded behind Fannie Mae was that the risk of being delivered an especially poor prepaying pool was greater with the Gold TBA. So Freddie Mac took steps to encourage originators to use the multiple-issuer pooling programs.
Exhibit 1: Single-issuer pools are predominantly issued by slower servicers
Slower servicers are, on average roughly 5% slower than the average servicer. The faster servicers are roughly 6% faster than average post-UMBS, but were 15.1% faster pre-UMBS. A major driver of this change is Quicken, which has issued far fewer generic pools after the introduction of UMBS.
Multiple-issuer pool production is far larger than generic single-issuer production
The majority of generic loans are already placed into multiple-issuer pools (Exhibit 2). In the UMBS-era, 76.0% of generic production has been placed in multiple-issuer pools. Another 21.4% of production has been placed in single-issuer pools from slow servicers, leaving only 2.6% of generic pools created by fast servicers.
Exhibit 2: 75% of generic pool production is in multiple-issuer pools
Single-issuer generic pools outperformed multiple-issuer pools during the summer refi wave
Prepayment speeds on 6-to-12 WALA single-issuer generic pools prepaid 13.0 CPR slower on average than the same-coupon multiple-issuer pools from July through October 2019, the height of the refinance wave (Exhibit 3). The first section in the table breaks the distribution of pools into those issued by faster and slower servicers, and each row segments the pools that prepaid faster and slower than the multiple-issuer pools. The second section calculates the CPR difference, faster or slower, than the corresponding coupon’s multiple-issuer pools.
Exhibit 3: Single-issuer pools prepaid slower than multi pools from July through October 2019
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
The majority of these pools (65.8%) were issued by slower servicers and prepaid 24.9 CPR slower than the multiple-issuer pool. Another 9.8% of pools were issued by faster servicers yet prepaid 29.4 CPR slower than the multiple-issuer pool. Overall 75.5% of single-issuer pools prepaid slower than multiple-issuer pools, by an average of 25.4 CPR.
The remaining 24.5% of single-issuer pools prepaid faster than the multiple-issuer pools, by an average 18.5 CPR. Within this population the pools issued by faster servicers prepaid significantly worse than those issued by slower servicers.
Overall the single-issuer pool population prepaid 13.0 CPR slower than the multiple-issuer pools. The disparity between the size of the multiple-issuer pools and the small amount of poor-performing single-issuer pools makes it very unlikely that TBA pricing is influenced by single-issuer pools.
Altering pooling practices would hurt servicers with better prepaying loans
The FHFA’s proposal would introduce sweeping changes to how loans are pooled and likely force most generic loan production from better prepaying lenders into the multiple-issuer pool. Market pricing already makes it more difficult for poor performing servicers to create their own pools, and these lenders generally deliver their loans into multiple-issuer pools. The prepayment data confirms that single-issuer pools generally outperformed multiple-issuer pools during the summer refinance wave. Most generic single-issuer pools are created by servicers with a history of good prepayment speeds.
The better lenders would lose the, potentially sizable, pay-ups they currently receive for their generic pools, while the multiple-issuer pools would get only marginally better. This would amount to a subsidy of the worse loans already in the multiple-issuer pool. Furthermore, the market would no longer be able to reward lenders with better servicing practices. The FHFA suggests that lenders with good prepayment history would be allowed to make generic single-issuer pools, but maintaining the list of approved lenders would be challenging. Similarly, the proposal would also make it more difficult to introduce new spec pool types, since new types would require FHFA approval through an unspecified process.
Instead the FHFA could require Fannie Mae to take similar steps as Freddie Mac to reduce single-issuer pool production by the worst servicers. Fannie Mae could also implement a program comparable to Freddie Mac’s alignment overflow program. This program is a non-TBA-eligible pooling program for lenders with significantly faster prepayment speeds than average. Both GSEs could use these programs more aggressively than Freddie Mac currently does (only one lender, Impac Mortgage, has ever been included in Freddie Mac’s alignment overflow pools). Such efforts could improve the quality of TBA-deliverable pools without drastic change to the MBS market.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
