"What is the TBA deliverable?" Lehman Brothers asked this question in a commentary last week, and the bank said that the answer is none too apparent as there may not be enough balance outstanding in the worst to deliver pools (WTD). WTD is usually what one would normally receive through TBA. In other words, it is not a given that WTD pools be delivered into TBA if the amount outstanding in these pools is insignificant.

As an example, analysts cited the fact that 2000 originations are the worst pools to be delivered in 7.0s. However, the amount outstanding is much less in the 2000 vintage compared to the 2001/2002 vintages.

The firm said that usually the general rule is that newer vintages are WTD in lower coupons, while 2000 originations are WTD in premiums. In terms of the lower coupons, analysts said that seasoned pools are more valuable because they have much more equity build-up, thus lowering extension risk.

In terms of the premiums, on the other hand, Lehman said it's generally believed that seasoned pools are more valuable because of burnout. But 2000 pools have higher gross WAC and loan balance. Additionally, these borrowers represent better credit compared to 2001/2002 originations (having been originated in a discount environment) and the callability of brand new pools is generally less than that of slightly seasoned pools. Because of these factors, analysts noted that the 2000 vintage could be considered the WTD in premiums.

There are some exceptions, such as in terms of GNMA 7s where the '01 vintage is the WTD. This is because of the lack of WAC difference across vintages in GNMAs, the fact that the loan balance on 2000 vintage GNMAs is not as high compared to 2001/2002 vintages as it is in conventionals, as well as the fact that the refinancing sensitivity of newer GNMA pools is much more like seasoned pools compared with conventionals.

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