GSE Execution – No Mysteries Here!

In my endeavors as a consultant, I find that the concepts of how to set loan pricing and then deliver under a GSE Whole Loan (Cash Window), or Mortgage-Backed Security (MBS) issuance is made to be far more complicated than necessary.  

I have seen individuals who hold roles in Capital Markets/Secondary Marketing keep the internal workings of the secondary market very tight to the vest. Why? If you create a sense that the topic is too big, then it’s job security!

I say this because, when I led a Capital Markets/Secondary Marketing effort in the IMB space, the focus that these topics demands can be draining to the audience. It’s not a conversation that occurs in a few hours. There is also a jargon, so to speak, that this expertise is driven by. Words like TBA, mandatory, best efforts, forward delivery, specified pools, buy-up, buy-down fees, guarantee fees, net service fee rate, MSR’s all come to the table – and the list goes on and on.   

This is where an individual who has the talent to then convert basic principles is paramount to have on your team. AND, if you use a hedge advisor your interaction and standards in which you work together must be established up-front. It is critical that the hedge advisor can clearly explain these concepts and how they are applied. Another requirement is that the hedge advisor aligns with your firm’s overall management philosophy and risk tolerance level.

To expand upon this discussion here are some basic concepts that seem to confuse leadership when they utilize GSE execution…

• I hear these words used interchangeably – Whole Loan and Cash Window, are they different?  

  • Answer: There is no difference in the concept. However, the method in which the loan(s) is committed for sale to the GSE’s results in the delivery of a whole loan.

    
    

• Is Whole Loan pricing and Mortgage-Backed Security pricing identical?

  • Answer: No, the pricing for a Whole Loan sale and MBS is totally different. 

    • §  GSE’s have their own internal pricing models and are purchasing the Whole Loan from your firm. The whole loan may (or may not be) held as an investment by the GSE as part of their return on investment.

    • §  MBS pricing is predicated upon assorted investors who create liquidity in the market. Pricing varies instantaneously and is heavily influenced by economic news and the basic supply and demand for the MBS in the market.

• Can the value of the MSR be different between Whole Loan -vs- MBS execution?

  • Answer: Yes, pricing is dependent upon the net service-fee rate that the servicer will earn over the life of the loan, the composition of the underlying collateral, and the type of MSR being valued. The servicing requirements are also based upon the type of Whole Loan sale or MBS issue.  MSR values are specifically different for GSE -vs- Ginnie Mae.

• What is a Guarantee Fee?

  • Answer: A Guarantee Fee is expressed in basis points by the GSE’s and Ginnie Mae. However, the Guarantee Fee charged by Ginnie Mae is much lower than what is charged by the GSE’s.  This is the fee charged to cover internal operating costs, and in the case of the GSE’s is used to cover other unexpected costs that may arise from loan servicing costs.

    
    

• What is a Buy-up or a Buy-down fee?

  • Answer: GSE’s allow for a buy-up or buy-down of the Guarantee Fee. When issuing an MBS and Specified Pool a calculation occurs for either the Buy-up or Buy-down of the Guarantee Fee. The calculation is based upon whether the difference between the note rate less the net service-fee rate and the MBS or Specified Pool coupon rate which creates excess interest rate spread (Buy-up), or a shortfall to the required interest rate spread (Buy-down). The calculation varies monthly based upon the Buy-up and Buy-down Grids published by the GSE’s.

• What is a Net Service Fee?

  • Answer: The term Net Service Fee applies to both Ginnie Mae MBS and GSE execution. It means this is the service-fee rate that is applied to either the Whole Loan sale, or the MBS pool. It is the future income stream that the servicer will be paid by either Ginnie Mae, or the GSE’s for the life of the loan.

    
    

• What is an MSR Valuation?

  • Answer: This is the process when a company which is an expert in analyzing and brokering loan servicing packages in the secondary market applies a projected cash value to a group of loan servicing rights. The analysis looks at the current and forecasted performance of the individual lenders MSR and compares that value to other MSR valuations of similar type and structure. Additionally, the MSR valuation can give insight into the current market pricing levels of MSR packages that have been traded, i.e., sold and purchased by other firms. The concepts are different where a valuation is based upon the economic value of the servicing rights based upon the projected performance of the MSR over the life of the loan – vs- the market value reflects MSR values with similar characteristics that have recently been traded in the market.

Ideally, this BLOG has the Leadership Team at your firm understanding that while Capital Markets/Secondary Marketing can be a complex topic, building a foundation is critical to success. The formation of this team within your organization is something to pay attention to. This team is a working group of individuals who can either make your firm a viable income stream and mitigate risk – or through a lack of knowledge and work discipline enters a space that is unforgiving. 

Execution in the secondary market when incorrect, or without transparency to Senior Leadership can result in significant mistakes, and losses that quickly impact your firm’s bottom line.  I recall an incident I heard of when rates fell quickly, and the loans at higher rates did not close as expected. This caused a mark-to-market pair-off loss against a mandatory MBS commitment of $700,000. This happened in a period of two weeks. Why?  Lack of discipline, communication with Senior Leadership and transparency. Lesson: “The first loss is the least loss.”

If this BLOG has hit a few things, you have wondered about, then I suggest it’s the right time for a different perspective about your firms “present state” in Capital Markets/Secondary Marketing. BlackFin has Capital Markets/Secondary Marketing experts with nearly 70 years of experience that you can tap into for an overall assessment. AND we can give you a perspective that ranges from working at, and with IMB’s, Credit Union’s, Community Banks, and Housing and Finance Agencies. We often tell our clients that you get the talent of two individuals for the price of one!

For more information, please contact: info@blackfin-group.com

Luana Slettedahl is a Principal Consultant with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements. In conjunction with her understanding how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com