In the following example, assume that the lender wants to place the following three ARM Plan 57 ARMs into a weighted-average ARM Flex MBS pool with a standard remittance cycle. All of the mortgages in the pool will be serviced under the special servicing option and will have a guaranty fee of 0.35%. All of the mortgages have borrower-purchased mortgage insurance.

Category | Loan A | Loan B | Loan C |
---|---|---|---|

Mortgage Interest Rate | 9.00% | 9.50% | 10.00% |

Mortgage Margin | 2.25% | 2.50% | 2.50% |

Mortgage Ceiling | 15.00% | 15.50% | 16.00% |

UPB | $70,000 | $50,000 | $60,000 |

Interest Rate Change Date | 1–Jun | 1–Jul | 1–Aug |

To develop a fixed MBS margin, the lender must first derive a loan-level servicing fee by reducing the mortgage margin for each mortgage to be included in the pool by the desired fixed MBS margin and then by the applicable guaranty fee percentage and, if applicable, by the periodic renewal premium for lender-purchased mortgage insurance. The differences in the servicing fees for the mortgages in the pool will be exactly equal to the differences in their mortgage margins. The weighted-average pool accrual rate is then determined by first reducing each individual mortgage interest rate by the servicing spread for the mortgage (the sum of the guaranty fee and the calculated loan-level servicing fee and, if applicable, the periodic renewal premium for lender-purchased mortgage insurance) and then developing a weighted-average of the net mortgage interest rates. This same procedure also is used to establish the maximum weighted-average pool accrual rate (and any applicable minimum weighted-average pool accrual rate), using the weighted-average of the net mortgage interest rate ceilings (or floors) of the mortgages in the pool.

Determine the loan-level servicing fee, using a 1.50% pool-level MBS margin.

Category | Loan A | Loan B | Loan C |
---|---|---|---|

Mortgage Margin | 2.25% | 2.50% | 2.75% |

MBS Margin | 1.50% | 1.50% | 1.50% |

Guaranty Fee | 0.35% | 0.35% | 0.35% |

Servicing Fee | 0.40% | 0.65% | 0.90% |

Determine the net mortgage interest rate.

Category | Loan A | Loan B | Loan C |
---|---|---|---|

Mortgage Interest Rate | 9.00% | 9.50% | 10.00% |

Guaranty Fee | 0.35% | 0.35% | 0.35% |

Servicing Fee | 0.40% | 0.65% | 0.90% |

Net Mortgage Interest Rate | 8.25% | 8.50% | 8.75% |

Determine the weighted-average pool accrual rate.

Loan ID | Net Mortgage Interest Rate | UPB | Product |
---|---|---|---|

Loan A | 8.25% | $70,000 | 5,775.00 |

Loan B | 8.50% | $50,000 | 4,250.00 |

Loan C | 8.75% | $60,000 | 5,250.00 |

$180,000 | 15,275.00 |

15,275/180,000 = 8.486%, rounded to three decimal places.

Determine the net mortgage interest rate ceiling.

Category | Loan A | Loan B | Loan C |
---|---|---|---|

Mortgage Interest Rate Ceiling | 15.00% | 15.50% | 16.00% |

Guaranty Fee | 0.35% | 0.35% | 0.35% |

Servicing Fee | 0.40% | 0.65% | 0.90% |

Net Mortgage Interest Rate Ceiling | 14.25% | 14.50% | 14.75% |

Determine the maximum weighted-average pool accrual rate.

Loan ID | Net Mortgage Interest Rate | UPB | Product |
---|---|---|---|

Loan A | 14.25% | $70,000 | 9,975.00 |

Loan B | 14.50% | $50,000 | 7,250.00 |

Loan C | 14.75% | $60,000 | 8,850.00 |

$180,000 | 26,075.00 |

26,075.00/180,0000 = 14.486%, rounded to three decimal places.

Determine the minimum weighted-average pool accrual rate (if the mortgages have an interest rate floor). Since the mortgages in this example do not have an interest rate floor, this step is not necessary. It is shown for illustration purposes only.

First, find the net mortgage interest rate floor by following Step Four, substituting the mortgage interest rate floor for the ceiling.

Then, follow Step Five to find the minimum weighted-average pool accrual rate, using the net mortgage interest rate floor just calculated for each mortgage instead of the mortgage interest rate ceilings.