The mortgage and MBS market landscapes have profoundly changed over the last month as a result of actions by both regulators and monetary authorities. While the more visible changes have resulted from the Fed's QE3 commitment to buy huge amounts of agency MBS, the less-discussed change in GSE guaranty fees has also impacted the consumer mortgage market and MBS issuance.

In addition to exerting upward pressure on mortgage rates, the mandated increase in guaranty fees has already impacted the conventional mortgage market by changing how loans are pooled into TBA-eligible Fannie and Freddie MBS. This discussion requires a brief review of pooling economics. Mortgage bankers have the option of pooling loans into different MBS coupons; absent other considerations, the originator will pool into the coupon that provides the greatest proceeds. The major variables are 1) the market prices of the two coupons, 2) the value that the originator places on "excess servicing" (i.e., servicing in excess of the 25 basis points of required servicing, 3) the amount of the guaranty fee, and 4) the price (or, more accurately, the multiple) at which the GSE will allow the originator to monetize (or "buy down") the guaranty fee.

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