Freddie Mac last week announced the implementation of enhancements for all PC pools starting July 2004. These changes are part of Freddie's ongoing review of its PC disclosure practices. They are also intended to promote increased transparency and to improve the accuracy of payment and disclosure on Freddie pools.
"These are simply new and more enhanced fields of information," said Douglas Robinson, spokesperson for Freddie Mac. "Increased information and transparency requirements are generally better for the market."
Freddie will disclose three new data elements: first payment distribution, first P&I payments and weighted average original loan size (WAOLS).
The first element - first payment distribution - will provide the loan count, the percentage of unpaid principal balance (UPB), as well as the percentage of all loans underlying the related PC that haven't reached their initial payment date. These will only be disclosed upon the issuance of a PC that includes such loans beginning with pools issued in July 2004.
The first P&I Payment pertains to the new initial interest products introduced on April 19 by the GSE. Freddie will start buying these mortgages in July, and the new disclosure element will correspond to the first date on which principal and interest will be due on this type of mortgage in a PC pool.
WAOLs will show the weighted average of the mortgage origination amounts in all PCs upon pool formation. Freddie will also make this information available for fixed-rate and ARM PCs. Average original loan sizes (AOLS) for ARM PCs and the quartile distributions for original loan size for ARM PCs will be provided. Freddie will continue to offer average original loan size for fixed-rate PCs.
Aside from providing information on original loan size for ARM PCs, Freddie is also adding other disclosure items for hybrid ARM PCs such as whether any loans have servicing spreads below 25 basis points and whether any loans have prepayment penalties.
Art Frank, head of mortgage research at Nomura Securities International, said that providing the weighted average original loan size and quartile distribution of loan sizes, particularly for ARMs, is going to be helpful. In terms of the ARM sector, the additional data will be good for valuing the payups above generic pools. For instance, both low loan balance and moderate loan balance trade at higher prices compared to generic pools. The data on prepayment penalty loans within ARM pools should improve investors' ability to value new hybrid ARM pools as well.
Previously, before the quartile tape became available, ARM market participants relied on the originators of the pools for this data. The fact that Freddie is now providing the information is a significant improvement for the market. "I think investors will be comforted in having that information officially come from Freddie Mac," said Frank.
As part of the first payment distribution element, Freddie is improving its weighted average loan age (WALA)/weighted average remaining maturity (WARM) calculation for fixed-rate PCs.
Nomura's Frank said that a more accurate weighted average loan age is also critical specifically for premiums. The decision as to whether to deliver a pool TBA or whether to get a premium above TBA relies partly on WALA, so a more accurate WALA computation is also a positive for the market.
Aside from these modifications, Freddie Mac also announced that it is introducing changes to its methodology for calculating principal payments on PCs. The principal balance of a PC pool can sometimes vary from the aggregate principal balance of the underlying mortgages because of a number of factors. In calculating principal payments on PCs, the GSE makes the needed adjustment to reconcile such differences. By introducing loan-level changes, this will allow Freddie to reconcile PC pool and mortgage balances more timely and accurately.
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