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PSA's good delivery guidelines - one more time.

Here we go again... Another column about the Public Securities Association (PSA) and its uniform practices for the clearance and settlement of mortgage-backed securities (more commonly referred to as PSA's good delivery guidelines). I'm not going to talk about the variance issue - specifically. Rather, recent events once again raise questions about the entire process PSA uses for establishing its good delivery guidelines for you.

What happened? You should all be aware by now that PSA approved a series of changes to its good delivery guidelines in early November. PSA discussed the proposed changes with Fannie Mae and Freddie Mac. PSA failed to notify MBA either that changes were under consideration or that the proposals had been approved. Certainly, there was no opportunity for MBA to comment before the guidelines were adopted. We did provide our comments after the fact.

In our unsolicited comments, we expressed concern about the substance of the changes as well as the process used to adopt them. Regarding substance, PSA has decided that 20-year mortgages should be pooled separately and excluded from 30-year TBA pools. However, it has delayed imposing an effective date for this "guidelines" pending the completion of necessary agency guide changes. MBA supports PSA's working with Fannie Mae and Freddie Mac to develop a 20-year market to enable those lenders who do a significant volume in 20-year loans to take advantage of the more favorable pricing spreads that a 20-year security would offer. However, MBA doesn't believe this market should be developed if it means 20-year loans can't be included in 30-year TBA securities. MBA is not convinced that the current origination volume of 20-year loans warrants segregating them from 30-year pools at this time.

MBA has recommended that PSA rescind rule or delay its implementation until the completion of an assessment of the continued popularity of 20-year loans. MBA expects that as the refi boom tapers off, production volume levels of 20-year loans will diminish correspondingly. Therefore, most lenders will not have enough loans to create separate 20-year securities. If PSA prohibits the inclusion of 20-year loans in 30-year securities, lenders will have no viable secondary market outlet for their 20-year loans. It follows that absent an effective secondary market outlet for 20-year loans, lenders will not offer a 20-year loan product to consumers, and the shared goal of the mortgage banking and securities industries for a TBA market for 20-year loans will never be achieved.

MBA also notified PSA of our reservations concerning its approval of two new types of non-standard loans, the new conventional assumable loans and skip-payment loans. Although MBA clearly regards these loan types as non-standard, the problem is that PSA appears to have added these two new types of loans to the non-standard loan category without increasing the pool composition caps for these loans. The current caps are 10 percent for any single type of non-standard loan and 15 percent for all non-standard loans. Without an increase in the caps, lenders that choose to provide borrowers with these new kind of loans will face increased difficulty in pooling them. This difficulty will be exacerbated by the recent increase in loan limits. MBA has recommended that the individual loan cap be increased to 15 percent and that the total cap be increased to 20 percent.

MBA doesn't think that the expression of the foregoing concerns on behalf of our members is frivolous. PSA's standards-setting activities directly affect mortgage bankers' business activities and their bottom lines. We believe that lenders should have a meaningful opportunity to participate in the development of good delivery guidelines. Notice to and dialogue with Fannie Mae and Freddie Mac is insufficient. The agencies should not be burdened with primary representation of their customers' interests. Moreover, the agencies' interests don't always coincide with those of their customers and their knowledge of customers' needs.

PSA has provided some background on why the good delivery guidelines were developed. In The History and Origins of the Public Securities Association 1912-1986, PSA notes that the good delivery guidelines grew out of a PSA initiative in the late 1970 to establish a formal self-regulatory organization. PSA decided that establishments of a formal self-regulatory body was a means to fend off threats of direct governmental regulation of Ginnie Mae securities dealers to curb perceived abuses in the marketplace. Although self-regulation was never implemented because the Department of Justice refused to approve a margin maintenance requirement, PSA did pursue development of uniform industry standards for processing, clearing and settling trades in mortgage-backed securities.
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Title Annotation:Public Securities Association
Author:Slesinger, Phyllis K.
Publication:Mortgage Banking
Date:Jan 1, 1993
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