Summary

Investors new to agency mortgage-backed securities (MBS) quickly discover that the trading, settlement, and clearing procedures for these securities differ from those for government and corporate securities. These differences arise due to the intrinsic features of agency MBS and the needs of mortgage originators who sell new securities into the secondary market.

  • Although each agency pass-through pool is unique, most trade on a generic or to-be-announced (TBA) basis. In a TBA trade, investors receive specific pool information two days before settlement. TBA trading is essential to market liquidity because it makes agency pools fungible (interchangeable). However, TBA trading is not obligatory; investors can request specific pools or characteristics.
  • Trading in agency pass-throughs may take place on any business day, but TBA securities usually settle on one specific date each month. The Bond Market Association (BMA) releases a monthly schedule that divides all agency pass-throughs into four groups, each settling on a different day. BMA also has established good delivery guidelines to ensure that

1. Each agency has established a payment delay that gives it time to process monthly payments received from mortgage originators and distribute them to the appropriate investors. The actual payment delays are 14, 19, 24, 44, and 14 days for Ginnie I, Ginnie II, Fannie Mae, Freddie Mac, Freddie Mac Guarantor, and Freddie Mac Gold PC, respectively.

settlement procedures are fair and efficient. Although most TBA trades conform to the BMA schedule and guidelines, trades can be negotiated to settle in whatever fashion is satisfactory to the buyer and seller.

• Like most government and corporate securities, agency pass-throughs generally clear through electronic book-entry systems. Although physical delivery is possible, the cost of removing mortgage securities from book-entry systems is substantial. The Depository Trust Company (DTC) controls GNMA products, and Fedwire handles FNMA and FHLMC securities. These systems also transfer monthly payments to investors.

APPENDIX

What Happens When an Investor Buys a Mortgage-Backed Security?

We now follow a sample trade through the settlement and clearing procedures for agency pass-throughs. Exhibit 4-4 provides a timeline from the date of the trade to receipt of the first monthly payment. Exhibit 4-5 shows the calculation of principal and interest components of the purchase price and the first monthly payment. Procedural details vary, depending on the dealer, customer, and security purchased.

On July 9, 2000, Joe Investor of ABC Management calls a dealer to buy a mortgage-backed security. After some discussion about the advantages and relative

EXHIBIT 4-4

Trade, Settlement, and Clearance Timeline for a Sample 30-Year Fannie Mae Security

Date Call July payment FNMA Recordholder of Issue out Settlement Record due from factors receives July trade date date date date mortgagors released prepayment

July August September

FNMA actual payment delay period

Purchase Price and First Monthly Payment for ABC's Purchase of 30-Year Fannie Mae Securities

Trade Date: July 19 (Thursday)

Face value

Coupon

101 10/32 (101.3125)

Call Out Date: August 14 (Monday)

Pool No. 1

Pool No. 2

Total

Original face value Factor

Current face value

$525,149.00 1.00000000 $525,149.00

$475,150.29 0.99934464 $474,838.90

$1,000,299.29 $ 999,987.90

Original Settlement Date: August 16 (Wednesday)

Pool No.1

Pool No. 2

Total

Principal Accrued interest Total due for purchase

$532,041.58 ($525,149 x 101.3125) $1,859.90 (8.5% x 15/360 x $525,149)

$481,071.16 ($474,838.90 x 1.1.3125) $1,681.72 (8.5% x 15/360 x $474,838.90)

$1,013,112.74 $3,541.62 $1,016,654.36

FNMA Releases August Pool Factors: September 7 (Thursday) Pool No. 1

Pool No. 2

Factor

0.9994214

0.99872234

Monthly Payment Date: September 25 (Monday)

Pool No. 1

Pool No. 2

Total

Principal3 Interest6

Total payment received

$303.85 ($525,149 x (1.0 - 0.9994214)) $3,719.81 (8.5% x 30/360 x $525,149)

$295.69 ($475,150.29 x (0.99934464 - 0.99872234)) 3,363.44 (8.5% x 30/360 x $474,838.90)

$ 599.54 $ 7,083.25 $ 7,682.78

a Principal payment is based on difference between the previous factor and current factor. It includes scheduled amortization and prepayments. b Interest payment is based on the previous month's face value.

a Principal payment is based on difference between the previous factor and current factor. It includes scheduled amortization and prepayments. b Interest payment is based on the previous month's face value.

value of various securities, Joe decides to buy a 30-year Fannie Mae pass-through with $1 million face value and a coupon of 8V2%. He agrees to pay a price of 16110/32, and he does not specify any pool characteristics. The dealer tells Joe that ABC will receive pool information on Monday, August 14 (the call-out date) and will receive the security two business days later on Wednesday, August 16. On July 24, ABC receives confirmation of the terms of the trade.

Sometime before 3 p.m. EST on August 14, ABC receives electronic notification that in two days it will receive two pools (though the guidelines allow from one to three) with the characteristics shown in Exhibit 4-2. One of the pools is new; it was issued on August 1 and has a 1.00 factor. The other has just begun to pay principal; it was issued on July 1 and has a factor slightly less than 1.00. ABC will receive slightly less than the face value requested, as allowed by the variance rule. On the settlement date, ABC must pay the agreed-on price plus accrued interest from August 1 to August 16, a total of $1,016,654.36.

On the August 16 settlement date, ABC receives notification that Fedwire has credited its securities account and debited its reserve (cash) account according to the terms of the transaction.

On the last day of August (the record date), Fedwire takes a snapshot of the location of all MBS in its system and registers ABC as the new holder of record for the security purchased. On the fifth business day of the month (September 7), Fannie Mae pool factors for July are released; this information is used to determine the payment of principal and interest due to ABC. Fannie Mae pass-through payments are made 24 days after the beginning of the month to the holder at the last record date. Therefore, on September 25, ABC receives notification that Fannie Mae has transferred a payment including principal (amortization and prepayments) and interest to its account via Fedwire based on August factor information. ABC will continue receiving monthly payments until it sells the pools.

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Responses

  • Letterio
    What is face value in a tba security?
    8 years ago
  • mohamed thomson
    What are trading factors fnma?
    8 years ago
  • GORBULAS
    How do you book interest on TBA securities?
    8 years ago
  • cherubino siciliano
    Can a mortgage tba trade with accrued interest?
    8 years ago
  • pervinca
    What day are mortgage backed factor pools released?
    8 years ago
  • crescente
    What day of the month does fnma post pool factors?
    8 years ago
  • roisin
    What does it mean wheh the monthly rollover for FNMA securities happens?
    5 years ago
  • niklas
    Are fnma mortgage backed security factors received on 5th business day?
    9 months ago
  • fre-weini
    Do you sell mbs on original face or factored face?
    6 months ago

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