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Gold quest.


Freddie Mac this month launches its new Gold PCs and Gold Cash program. It's new twist in the competitive MBS market.

The complexity of investors' needs and the scope of lenders' operational capacities have changed dramatically since Freddie Mac created the conventional mortgage pass-through security in 1971. Advances in telecommunications and data processing, including sophisticated computers that can process and manipulate increasingly large volumes of data have helped to speed up the evolution that is occurring in the secondary mortgage market.

This month, Freddie Mac debuts its newly enhanced Mortgage Participation Certificate--known as the Gold PC and the Gold Cash program--and by doing so, seizes an opportunity to enhance the PC to meet evolving secondary market needs.

Gold PCs, issued under Freddie Mac's Guarantor Program or formed from its cash programs, will feature the fastest pass-through of any conventional mortgage security program available. If you're a cash customer, your loans will be priced closer to the market than ever before. Both enhanced programs will offer higher prices and easier evaluation of secondary market products, and will aid lenders in offering more affordable mortgage money to their borrowers.

What exactly is the nature of these enhanced products, and why are they arriving on the scene now? And what was the product development process like? The stories behind new investor opportunities, and corporate efforts to bring them to market, point to a mortgage finance industry coming of age. This progress stems not just from logical progressions in response to market demand, but also from conceptual and operational leaps forward.

Freddie Mac has been innovative before in the development of mortgage securities. The history of the corporation includes such milestone developments as the first conventional mortgage pass-through, the Guarantor Program early in the 1980s, the first multiclass security (the collateralized mortgage obligation) and the first adjustable rate pass-through. Despite these innovations, Freddic Mac's securities' cash flow structures had remained the same from the start of the Guarantor Program until now.

In creating the Gold PC, Freddie Mac kept in mind three objectives. Those goals included a desire to make Freddie Mac's programs and products easier for customers to evaluate and to use; accelerate the pass-through of payments to investors; and eliminate predictive factors for estimating borrower prepayments for cash PC pools.

Gold features

Gold PCs formed under Freddie Mac's guarantor and cash programs have identical investor payment cycles, and closely resemble the Ginnie Mae security. With Gold PCs, pass-through amounts reflect scheduled mortgage amortization for the current month calculated by Freddie Mac, plus actual full prepayments received through the prior month.

In addition, the guarantee of timely payment of both interest and principal with Gold PCs now offers investors greater payment certainty. This enhancement should make the securities more attractive as collateral in REMICs and other derivative securities.

Following are some specifics on Gold PCs and Gold Cash. The Gold PC's brightest feature is its accelerated pass-though. The Gold PC features a period of up to 45 days from security issuance to investor payment, and a 14-day delay from the borrower's payment due date to Freddie Mac's pass-through to investors. A major factor in the security's greater market value comes from PC holders receiving payments faster.

Beginning in October, nearly $300 billion in existing PCs can be converted to Gold PCs. The exceptions are securities already pledged to derivative security offerings. The conversion option, which will be phased in according to mortgage type, has been a key in maintaining PC liquidity during the transition to Gold PCs. Each conversion transaction will be subject to a fee that reflects Freddie Mac's estimate of the economic value of the accelerated cash flow but does not include the value of other benefits of conversion, such as the fee waiver on Giants, and guaranty of timely payment of monthly principal reduction. The first phase will include securities backed by 15-and 30-year, fixed-rate, single-family mortgages. Conversion to Gold PCs backed by other mortgage types will be announced separately at a later date.

Virtually no changes to seller/servicers' reporting and remittance requirements are necessary to accommodate the faster pass-through.

The Gold Cash program boasts its own set of new features. Under Gold Cash, customers can sell conventional, single-family mortgages with the price advantage that swap executions offer. Over our commitment line, a Freddie Mac representative will ask for mortgage coupons and loan balances, then quote a price based on the market price for a PC backed by similar mortgages. Use of required net yields or discount formulas will not be necessary. Customers can sell through the cash window loan-by-loan, an attractive feature for smaller lenders. Finally, the cash program offers lenders quick funding--one or two days from date of delivery. It's a convenient, one-step process, no matter how many or how few mortgages lenders want to sell.

Customers can sell their full mortgage yields, instead of selling only to par and retaining servicing. This enhancement will help sellers resolve restrictive accounting and regulatory practices related to servicing.

Strategic thinking

Enhancing the attractiveness of mortgages as an investment helps lower the cost of mortgage credit and increases the flow of funds into housing. The purchase and securitization of mortgages, to that end, is Freddie Mac's mission, which it accomplishes by offering products that meet market demand.

However, it was important for Freddie Mac to weigh carefully the consequences of modifying its security characteristics. A number of concerns had to be considered.

For example, the original PC, with a 75-day payment delay and guarantee of timely principal payments, has served Freddie Mac well for two decades. Investors knew its performance. In addition, a process to assure a smooth conversion from original PCs to Gold PCs was essential.

Freddie Mac satisfied these and other concerns with an intensive effort over several months that involved seller/servicers, investors and investment bankers active in the secondary mortgage market. Finally, Freddie Mac reached a level of comfort that its systems and procedures were more than adequate to assure a successful conversion.

Many staff hours went into this effort. A core group of individuals from the capital markets and marketing division of Freddie Mac began formally developing the program in 1988. A feasibility study was approved and implemented. To gauge reactions to a revamped security and to solicit advice, Freddic Mac's mortgage finance department discussed the proposed changes with selected investment houses. Freddie Mac's investor marketing unit talked with some 20 major Freddie Mac investors. In addition, many seller/servicers contributed their views to the development of the enhanced security. The majority said that the new security's benefits would warrant the higher price and increase in guarantee fee.

In the Gold Cash program, several pilot tests were carried out with selected lenders from different regions of the country. The tests confirmed that the revamped mortgage purchase program had achieved its objective of providing lenders with the best execution--by maximizing the price and the servicing contract.

Gold PC status report

The response has been excellent judging by the current number of repeat users from the pilot group. Gold PC forward trades for settlement in October have already been made at prices three-quarters of a point over original PCs. As the derivative market for Gold PCs develops, the price of Gold PCs should move still higher.

Freddie Mac has been buying and securitizing mortgage loans for several years. The Gold PC represents a special maturing of our function, a unique contribution to the capital market's array of products.

David Andrukonis heads the mortgage finance department at Freddie Mac in Washington, D.C.
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Title Annotation:Federal Home Loan Mortgage Corp.'s enhanced Mortgage Participation Certificate, the Gold PC and the Gold Cash program
Author:Andrukonis, David
Publication:Mortgage Banking
Date:Oct 1, 1990
Previous Article:The service commodity: lenders today should avoid solely competing with numbers and let their service quality shine.
Next Article:Secondary market.

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