GSE disclosure to cause tiering in MBS

Improved pool-level disclosure by Fannie Mae and Freddie Mac starting June would likely result in a distinct tiering in the MBS market, said a report released by Credit Suisse First Boston this morning.

Beginning this June, the GSEs will be offering enhanced disclosure on outstanding and new origination MBS pools. Each pool, frequency or quartile distributions, as applicable, will be provided on the following loan characteristics: property type, original LTV, occupancy type, FICO score, loan purpose, and servicer & seller.

Increased disclosure would now allow buysiders to look for pools with characteristics that deliver the most favorable prepayment performance. This resulting segmentation, said analysts, will probably further develop the market for specified pools. CSFB said this could also become a factor contributing to a more adversely selected “true TBA.” The firm explained that in a market where participants such as CMO desks are already paying up for certainty in collateral characteristics, the increased adverse selection in the TBA market will likely further spur specified pool pay-ups.

In the report, CSFB provides guidance to investors by identifying desired pool characteristics and their likely impact on prepayments and valuations. The study was based on the CSFB Mortgage Strategy team’s study of loan-level prepayment data on Agency-eligible Alt-A mortgages.

A key finding in the study is that low FICO scores, investor properties, cash-out/rate-term refinance loans, and high loan-to-value (LTV) mortgages have each exhibited favorable prepayment behavior historically. Meanwhile, prepayment speeds by property or documentation type did not really show any statistically significant differences along these characteristics.

CSFB focused on Alt-A collateral because a larger number of loans within this sector have the beneficial characteristics identified above. To highlight this, the firm compared the distribution of loans for this data set to the distribution on recently-created FNMA pools.

In the report, CSFB offers preliminary valuation guidance on these potentially new specified pool sectors “by placing them within the continuum of traditional prepayment sheltered alternatives.”