The Securities Industry and Financial Markets Association (SIFMA) announced today 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 To-Be-Announced (TBA) eligible mortgage-backed securities (MBS). To preserve the homogeneity and minimize liquidity disruption in this important market, SIFMA recommends that higher balance loans may comprise up to 10 percent of the total balance of a pool eligible for TBA delivery. SIFMA’s recommendation comes on the heels of 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. 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,” said Sean Davy, managing director at SIFMA.
When mortgage loan limits were temporarily increased in February, SIFMA recommended higher-balance mortgages be pooled separately, in part due to the temporary nature of the program.
With the establishment of new, permanently-higher loan limits, SIFMA members considered the critically important role that the TBA market plays in providing housing financing, especially given the current market stress and the reduction in credit availability, and sought to preserve the certainty and significant homogeneity that this market depends upon. Given that the liquidity in the TBA market is attributed to the shared basic characteristics of the underlying loans, the decision contemplated the ability of the market 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," elaborated Davy. "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.
