Freddie Mac's recent announcement that it would ensure that Gold PC prepayments are consistent with market norms is positive for Gold/FNMA swaps, analysts said.

One of the strategies mentioned is the immediate development of contractual incentives and penalties around sellers' prepayment experience on outstanding and new PCs. Market observers said that this implies that Freddie would probably reward sellers whose pools manifest slower-than-average prepayments while penalizing sellers whose pools are prepaying faster than the norm.

In a recent report, Merrill Lynch said that a number of questions should be clarified. One is the issue of what defines average prepayments and whether there would be adjustments for factors like geographic regions, loan size, WAC and WALA. Another question would be what kind of incentives and disincentives Freddie would be offering and will they be part of a separate agreement. Also, will guarantee fees on new pools be dependent on the performance of existing pools every month? There is also the aspect of issuers' response to the proposal such as, Will those who are penalized choose to do business with Fannie Mae instead?' These outstanding issues aside, Merrill said that this is the most important strategy in terms of prepayments on existing pools.

Freddie also said that it would return loan characteristics and seller/servicer diversity to more typical levels over the remainder of the year. Merrill said that this statement might mean Freddie would like to include a higher percentage of pools that are less sensitive, either in terms of issuers or across collateral characteristics. In terms of issuers, ABN Amro and Wells Fargo have slightly increased their share of Golds in recent years. But Merrill said that these issuers have really not prepaid significantly faster than the average Golds. In comparison, there are some Fannie issuers like Countrywide and Chase who have actually brought down Fannie's average. Analysts said that if Freddie succeeds in getting slower issuers or better characteristics, this would probably impact newer pools but would definitely have no effect on existing pools.

The third strategy that Freddie announced is the expansion of REMIC opportunities for dealers and investors with removal allocations. Merrill said that this would really have no impact on prepayments but would likely make dealers more comfortable with doing Gold CMOs because it would allow them to price deals as they are executed rather than having to sign up for an allocation before the transactions get done and having to take the risk involved.

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