Selling Guide

Published October 2, 2018

C3-5-02: Stated-Structure ARM MBS Pooling Process (04/01/2009)

This topic provides information on stated-structure ARM MBS pooling process.

Pooling Process for Stated-Structure ARM MBS

The examples assume that the lender plans to pool ARMs with a minimum servicing fee rate of 0.250% into a pool with a standard remittance cycle and that all of the mortgages in the pool are serviced under the special servicing option and have a guaranty fee of 35 basis points. All of the mortgages have borrower-purchased mortgage insurance.

Category Loan A Loan B Loan C
Mortgage Interest Rate 7.950% 7.750% 7.875%
Mortgage Margin 2.750% 2.850% 3.000%
Mortgage Ceiling 13.750% 13.650% 13.500%
First Payment Date 03/01/02 06/01/02 09/01/02
First Interest Rate Change Date 08/01/02 08/01/02 08/01/02

These mortgages will be delivered as a single pool transaction so each step in these procedures should be followed. If the lender wanted to include these mortgages in a Fannie Majors multiple pool transaction, Steps One through Three would not be necessary because Fannie Mae posts the pool parameters for multiple pools. However, the lender would need to determine the range of acceptable ARM rates based on the guaranty fee and the minimum servicing fee (see Step Four).

Step One: Determine the Pool Accrual Rate

The pool accrual rate is based on the mortgage interest rates that are in effect on the issue date; therefore, each mortgage interest rate must at least support the sum of the pool accrual rate, the guaranty fee, and the minimum servicing fee.

  • In view of the above, the lowest mortgage interest rate would be the basis for determining the pool accrual rate. This would be Loan B at 7.750%. Subtract the guaranty fee and the minimum servicing fee from the lowest mortgage interest rate to derive a net ARM rate (7.750% – 0.350% – 0.250% = 7.150%).

  • The pool accrual rate must be evenly divisible by 0.125. If the net ARM rate is not evenly divisible by 0.125, it must be rounded down to at least the nearest .125%. (It could be rounded down further to increase the lender’s servicing fee above the 0.250% Fannie Mae specified in the example for this pool.) The net ARM rate for Loan B (7.150%) is not evenly divisible by 0.125, but rounding it down to 7.125% makes it evenly divisible.

  • Thus, the pool accrual rate for this pool will be 7.125%.

Step Two: Determine the MBS Margin

After the first interest rate change date, the pool accrual rate is a function of the MBS margin and the index (rounded to the nearest .125% and subject to any periodic or lifetime caps). Therefore, each mortgage margin must support the sum of the MBS margin, the guaranty fee, and the minimum servicing fee.

In view of the above, the lowest mortgage margin would be the basis for determining the MBS margin. This would be Loan A at 2.750%. Subtract the guaranty fee and the minimum servicing fee from the lowest mortgage margin to derive a net mortgage margin (2.750% ?0.350%?0.250% = 2.150%).

  • The MBS margin must be evenly divisible by 0.125. If the net mortgage margin is not evenly divisible by 0.125, it must be rounded down to at least the nearest .125%. (Rounding down further would increase the lender’s servicing fee.) The net mortgage margin for Loan A (2.150%) is not evenly divisible by 0.125, but rounding it down to 2.125% makes it evenly divisible.

  • Thus, the MBS margin for this pool would be 2.125%.

Step Three: Determine the Maximum Pool Accrual Rate

The maximum pool accrual rate is based on the mortgage interest rate ceilings of the mortgages in the pool. Therefore, each mortgage interest rate ceiling must at least support the maximum pool accrual rate, the guaranty fee, and the minimum servicing fee.

  • In view of the above, the lowest mortgage interest rate ceiling would be the basis for determining the maximum pool accrual rate. This would be Loan C at 13.500%. Subtract the guaranty fee and the minimum servicing fee from the lowest mortgage interest rate ceiling to derive a net mortgage ceiling (13.500% – 0.350% – 0.250% = 12.900%).

  • The maximum pool accrual rate must be evenly divisible by 0.125. If the net ARM ceiling is not evenly divisible by 0.125, it must be rounded down to at least the nearest .125%. (Rounding down further would increase the lender’s servicing fee.) The net mortgage ceiling for Loan C (12.900%) is not evenly divisible by 0.125, but rounding it down to 12.875% makes it evenly divisible.

  • Thus, the maximum pool accrual rate for this pool would be 12.875%.

Step Four: Determine the Minimum and Maximum Spreads for the Pool Parameters (as developed in Steps One through Three) and Determine the Range of Eligible Mortgage Interest Rates

The minimum spread is determined by adding the guaranty fee and the minimum servicing fee to the pool parameter that was previously determined.

  • In Step One, the Pool Accrual Rate was established at 7.125%, so the minimum current mortgage interest rate that could be included in the pool would be 7.725% (7.125% + 0.350% + 0.250% = 7.725%).

  • In Step Two, the MBS Margin was established at 2.125%, so the minimum mortgage margin that could be included in the pool would be 2.725% (2.125% + 0.350% + 0.250% = 2.725%).

  • In Step Three, the Maximum Pool Accrual Rate was established at 12.875%, so the minimum mortgage interest rate ceiling that could be included in the pool would be 13.475% (12.875% + 0.350% + 0.250% = 13.475%).

The maximum spread is determined by adding 1% to the minimum spreads calculated above.

  • Based on the Pool Accrual Rate determined in Step One, the maximum current mortgage interest rate that could be included in the pool would be 8.125% (7.125% + 1.000% = 8.125%).

  • Based on the MBS Margin determined in Step Two, the maximum mortgage margin that could be included in the pool would be 3.125% (2.125 + 1.000% = 3.125%). (The numbers in this example would only be allowed if it were a negotiated transaction since the maximum allowed for most standard plans is 3.00%.)

  • Based on the Maximum Pool Accrual Rate determined in Step Three, the maximum mortgage interest rate ceiling that could be included in the pool would be 13.875% (12.875% + 1.000% = 13.875%)

Compare the mortgage interest rate of each ARM to be pooled to the minimum and maximum allowable spreads. In this example, all three ARMs are eligible for the pool because each has a mortgage interest rate, mortgage margin, and mortgage interest rate ceiling that falls within the allowable spreads. If other ARMs were to be included in the pool, they would have to have a current mortgage interest rate in the range from 7.725% to 8.125%, a mortgage margin in the range from 2.725% to 3.125%, and a mortgage interest rate ceiling in the range from 13.475% to 13.875%.

If the lender wanted to receive a higher servicing fee for the mortgages in a given pool, it could do so. However, in such cases, the lender would have to decrease the 1% spread between the minimum and maximum rates by the amount of the servicing fee increase. For example, if the lender wanted a 0.375% servicing fee—an increase of .125%—it would have to reduce the spread between the minimum and maximum rates to 0.875% (1.000% – 0.125% = 0.875%). This adjustment is required to ensure that the maximum servicing fee does not exceed 1.375%.

Step Five: Determine Whether the Servicing Fee for Any Mortgage in the Pool Will Vary More than 0.25% over the Life of the Mortgage

Each mortgage interest rate must support the pool accrual rate, the guaranty fee, and the minimum servicing fee. Mortgages with higher mortgage interest rates, mortgage margins, and mortgage interest rate ceilings will have higher servicing fees. To equalize the various components, mortgages with different mortgage interest rates, mortgage margins, or mortgage interest rate ceilings will have different servicing fees.

In view of the above, compare the mortgage interest rate, mortgage margin, and mortgage interest rate ceiling for each mortgage to the specified related pool parameters (less the guaranty fee) to derive the total servicing fee variance. In this example, all three mortgages are eligible for inclusion in the pool because none of them has a variance between the highest and lowest servicing fees that is greater than 0.25% (as calculated by using each of the different parameters).

  • For Loan A, the variance between the highest and lowest servicing fees—0.250% (0.525% – 0.275% = 0.250%)—is developed as follows:

    Category Interest Rate Margin Ceiling
    Mortgage 7.950 2.750 13.750
    – Pool 7.125 2.125 12.875
    – Guaranty Fee 0.350 0.350 0.350
    Servicing Fee 0.475 0.275 0.525
  • For Loan B, the variance between the highest and lowest servicing fees—0.150% (0.425% – 0.275% = 0.150%)—is developed as follows:

    Category Interest Rate Margin Ceiling
    Mortgage 7.750 2.850 13.650
    – Pool 7.125 2.125 12.875
    – Guaranty Fee 0.350 0.350 0.350
    Servicing Fee 0.275 0.375 0.425
  • For Loan C, the variance between the highest and lowest servicing fees—0.250% (0.525% – 0.275% = 0.250%)—is developed as follows:

    Category Interest Rate Margin Ceiling
    Mortgage 7.875 3.000 13.500
    – Pool 7.125 2.125 12.875
    – Guaranty Fee 0.350 0.350 0.350
    Servicing Fee 0.400 0.525 0.275