The first-ever excess-servicing securitization backed by Fredie Mac collateral was well received by the I/O market, despite initial concerns regarding a large-sized excess servicing transaction. Although the securitization had been announced, the I/O market felt some relief because there is no indication that this securitzation for Countrywide will be sold any time soon.
 
In a Lehman Brothers report released today, researchers noted the servicing retention began as a way to monetize 30-year 5/5.5 swap cheapness, significantly increasing the amount of excess servicing being created in the last five months. Analysts added that although excess PC Gold servicing has kept pace with FNMAs, there had previously been no tested avenue for offloading this to the market. The creation of the Freddie program comes at an opportune time, with roughly $1.5 billion in 30-year conventional trust I/O equivalents being created every month by the retention of more servicing. This is compared to less than $250 per month previously. With a considerable excess servicing retained in both GSE pools recently, the creation of a Freddie program seems like an indication of more such deals being securitized going forward, analysts added.

Lehman also noted Ginnie Mae's putting out a proposed rule to start the Ginnie excess servicing program. But compared to conventionals, there has been very little excess servicing retained by the agency, although the new program would likely result in the rise of I/Os retained by Ginnie originators. Potential sources of demand for Ginnie I/Os are accounts needing the explicit government guaranty and choosing to invest in these I/Os for the yield or to short the market as well as buysiders looking for hedges in a slowing housing market. Ginnie I/Os are, according to analysts, more leveraged to the housing market compared to their conventional counterparts with Ginnie borrowers having relatively weaker credit.

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