The Securities Industry and Financial Markets Association (SIFMA) said that newly originated loans to borrowers in high cost areas as defined in the Housing and Economic Recovery Act of 2008 (H.R. 3221) will qualify for incorporation into TBA eligible MBS.

According to a SIFMA release, the association recommended that higher balance loans might comprise up to 10%  of the total balance of a pool eligible for TBA delivery "to preserve the homogeneity and minimize liquidity disruption in this important market."

The recommendation comes after the passage of H.R. 3221, which permanently increased the loan limits for high cost areas, up to a maximum of $625,550.

"We expect higher balance borrowers to receive both rate relief and increased liquidity as was desired in the legislation, while retaining the overall liquidity of the TBA market, " said Sean Davy, managing director at SIFMA. "This arrangement preserves the overall homogeneity of the market while at the same time minimizing the risk of a negative impact on mortgage rates for lower balance loan borrowers, or, potentially, all borrowers.”

When mortgage loan limits were temporarily increased in February, the association had suggested that higher-balance mortgages be pooled separately, partly because of the temporary nature of the program.

However, with the establishment of new, permanently-higher loan limits, SIFMA members considered the critical role that the TBA market plays in providing housing finance, especially in the current market environment, and sought to preserve the homogeneity that this market depends upon.

Considering that the liquidity in the TBA market is caused by the shared basic characteristics of the underlying loans, the SIFMA considered the market's ability to assimilate higher balance loans with somewhat different prepayment behavior. 

"We expect the market to smoothly digest the change made under the new SIFMA guidelines and continue to provide liquid and efficient pricing for mortgage securities,"  Davy said.  "The importance of preserving the liquidity and stability of the TBA market cannot be overstated."

The decision will be published in an updated version of SIFMA's Standard Requirements for Delivery on Settlements of Fannie Mae, Freddie Mac and Ginnie Mae securities, also known as the Good Delivery Guidelines.

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