Selling Guide

Published June 5, 2018

C3-5-04: Calculating the Weighted-Average Pool Accrual Rates for ARM Flex Pools Using a Fixed MBS Margin (04/01/2009)

This topic contains information on calculating the weighted-average pool accrual rates for ARM Flex pools using a fixed MBS margin.

How to Determine the Weighted-Average Pool Accrual Rate(s) for ARM Flex Pools Using a Fixed MBS Margin (based on Pool-Level MBS Margin and Loan-Level Servicing Fee)

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.

Step One:

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%

Step Two:

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%

Step Three:

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.

Step Four:

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%

Step Five:

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.

Step Six:

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.