Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

THE ROLE OF THE MBS MARKETS IN GENERATING CONSUMER LENDING RATES

An ancillary benefit of the growth in the MBS sector and the integration of consumer mortgage markets is the increased rationality of loan pricing to the consumer. As the mortgage market has become increasingly national in scope over the years, the influence of local supply and demand conditions has become less important in determining marketclearing rates. At the same time, the importance of capital markets in the loan funding and risk transfer process has grown. Consequently, consumer borrowing rates have become directly linked with capital market rates and flows, as well as investor demand for the associated securities. In this section, we examine some of the links between the pricing of mortgage products to the consumer and developments in the capital markets. We initially use the fixed rate agency MBS markets as an example, and subsequently relate the rate setting processes to other markets and products.

In order to maximize their proceeds, the optimal coupon execution for different note rate strata is regularly calculated by the originator. Optimal execution is a function of the levels of pass-through prices for different coupons, as well as servicing valuations and guaranty fee buydown pricing. Exhibit 2.6 shows two possible execution scenarios for a loan with a 6.25% note rate. In the example, securitizing the loan in the 6.0% pool is the best execution option, since it provides greater proceeds to the ...