Recording and Mortgage Electronic Registration Systems

Complex structured products tend to trade less frequently and involve more negotiation.
Prices for
these more complicated MBSs, as well as for CMOs and CDOs, tend to be more subjective, often
available only from dealers.[38]
For "vanilla" or "generic" 30-year pools (issued by Fannie Mae, Freddie Mac, or Ginnie Mae) with
coupons of 3.5%–7%, one can see the prices posted on a TradeWeb screen by the primaries called
To Be Allocated (TBA). This is due to the actual pools not being shown. These are forward prices for
the next 3 delivery months since pools have not been cut; only the issuing agency, coupon, and
dollar amount are revealed. A specific pool whose characteristics are known would usually trade
"TBA plus {x} ticks" or a "pay-up", depending on characteristics. These are called "specified pools",
since the buyer specifies the pool characteristic he/she is willing to "pay up" for.
The price of an MBS pool is influenced by prepayment speed, usually measured in units of CPR
or PSA. When a mortgage refinances or the borrower prepays during the month, the prepayment
measurement increases.
If an investor has acquired a pool at a premium (>100), as is common for higher coupons, then
they are at risk for prepayment. If the purchase price was 105, the investor loses 5 cents for every
dollar prepaid, which may significantly decrease the yield. This is likely to happen as holders of
higher-coupon mortgages can have a larger incentive to refinance.
Conversely, it may be advantageous to the bondholder for the borrower to prepay if the low-coupon
MBS pool was bought at a discount (<100). This is due to the fact that when the borrower pays back
the mortgage, he does so at "par". If an investor purchases a bond at 95 cents on the dollar, as the
borrower prepays the investor gets the full dollar back, increasing their yield. However, this is less
likely to occur, as borrowers with low-coupon mortgages have lower, or no, incentives to refinance.
The price of an MBS pool is also influenced by the loan balance. Common specifications for MBS
pools are loan amount ranges that each mortgage in the pool must pass. Typically, high-premium
(high-coupon) MBSs backed by mortgages with an original loan balance no larger than $85,000
command the largest pay-ups. Even though the borrower is paying an above market yield, he or she
is dissuaded from refinancing a small loan balance due to the high fixed cost involved.
Low Loan Balance: < $85,000
Mid Loan Balance: $85,000–$110,000
High Loan Balance: $110,000–$150,000
Super High Loan Balance: $150,000–$175,000
TBA: > $175,000
The plurality of factors makes it difficult to calculate the value of an MBS security. Often market
participants do not concur, resulting in large differences in quoted prices for the same instrument.
Practitioners constantly try to improve prepayment models and hope to measure values for input
variables implied by the market. Varying liquidity premiums for related instruments and changing
liquidity over time make this a difficult task. One factor used to express price of an MBS security is
the pool factor.
Recording and Mortgage Electronic Registration

Systems[edit]
One critical component of the securitization system in the US market is the Mortgage Electronic
Registration Systems (MERS) created in the 1990s, which created a private system wherein
underlying mortgages were assigned and reassigned outside of the traditional county-level recording
process. The legitimacy and overall accuracy of this alternative recording system have faced serious
challenges with the onset of the mortgage crisis: as the US courts flood with foreclosure cases, the
inadequacies of the MERS model are being exposed, and both local and federal governments have
begun to take action through suits of their own and the refusal (in some jurisdictions) of the courts to
recognize the legal authority of MERS assignments.[46][47] The assignment of mortgage (deed of trust)
and note (obligation to pay the debt) paperwork outside of the traditional US county courts (and
without recordation fee payment) is subject to legal challenge. Legal inconsistencies in MERS
originally appeared trivial, but they may reflect dysfunctionality in the entire US mortgage
securitization industry.

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Complex structured products tend to trade less frequently and involve more negotiation.

Recording and Mortgage Electronic Registration

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