Changes to Freddie Mac's MultiLender swap program should create larger, more predictable and liquid Gold pools, researchers said last week.

"A number of investors are reluctant to buy Golds (or will only buy Golds at a significant yield concession to their Fannie counterparts) due to liquidity differentials," penned analysts at UBS. "If Freddie entices some of these investors to look more favorably on Gold liquidity, then Gold pricing would improve." They added that, specifically, the goal of the enhanced program is to raise buysider expectations regarding what "TBA Gold delivery" means.

The changes include allowing lenders who use their MultiLender programs to swap conventional 15-year and 30-year fixed-rate mortgages for Giant PCs. Under the old program, lenders exchanged these mortgages for a pro rata share of Gold PCs. These enhancements are effective for MultiLender pools posted on and after April 1, and for settlements on and after July 1. With the modifications, Freddie can now create Giant PCs by combining Gold PCs backed by mortgages in its Cash program with Golds PCs backed by loans in its MultiLender Swap program.

Through these enhancements, Freddie "laid the foundation for a more liquid, predictable and representative PC security," said Douglas Robinson, a spokesperson at the GSE. "We think it will improve the execution of the MultiLender product." He added that both investors and lenders have received the changes well thus far.

In its report, UBS said that the most effective way for Freddie to improve its pricing is to open the MultiLender program to the delivery of pools by dealers and investors. The "super-sized Multi-Giant" that will result can show the market what constitutes "worst-to-deliver" as well as enhance liquidity.

Freddie's switch to giants appears to do very little in terms of immediate economics, added analysts. They noted that the GSE's industry letter on the MultiLender program promises originators a pro rata share of a pool made up of mortgages delivered through the Cash and MultiLender programs. So even if a giant can theoretically be made up of pre-existing pools and loans, this option is not yet available to MultiLender pools. But this movement to giants "sets the stage" for future changes to this program.

A possible change that should be consistent with Freddie's goal to improve liquidity and homogeneity in TBAs, analysts said, will be to allow delivery of pre-existing pools into the MultiLender giant program. In this instance, dealers and investors (including the Freddie retained portfolio) can deliver pools into the incipient multi-giant. Freddie will also mix mortgages from its cash multi swap windows into the multi-giant. Contributors will get pro rata shares of one big multi-giant pool in exchange, explained analysts.

Though Freddie has not made any move to permit delivery of pools into the MultiLender program, UBS maintains "this is a logical action to take, given their stated goals. Considering the potentially transformative effect on the TBA market, it seems prudent to examine the impact and likely success of such a program."

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