Department of Office of Federal Housing Securities and Exchange 

 the Treasury Enterprise Oversight Commission 

STAFF REPORT: 

ENHANCING DISCLOSURE IN THE MORTGAGE-BACKED SECURITIES MARKETS

A Staff Report of the Task Force on Mortgage-Backed Securities Disclosure 

January 2003 
i 

Staff Report: 

Enhancing Disclosure in the Mortgage-Backed Securities Markets 

A Staff Report of the Task Force on Mortgage-Backed Securities Disclosure 

Contents 

Executive Summary 1 

I. Introduction 4 

II. Background 5 

A. Issuers 5 

B. MBS Investors 6 

C. Mortgage-Backed Securities 7 

1. Secondary Mortgage Market Enhancement Act of 1984 8 

2. Effect of Tax Laws on MBS Markets 8 

3. Types of Underlying Mortgage Loans 9 

4. Guarantees or Credit Enhancements 11 

5. Risks – Prepayment and Credit 11 

a. Prepayment Risk 11 

b. Credit Risk 12 

D. Structure of the MBS 13 

1. Pass-Through Securities 13 

2. REMICS 14 

E. Creation and Sales of GSE and Ginnie Mae MBS 15 

1. Creation of GSE and Ginnie Mae MBS 15 

2. The To-Be-Announced Market 16 

3. Types of Trades of TBA-Eligible MBS 20 

4. Dollar Rolls 21 

F. Creation and Sales of Private-label MBS 22 

1. Creation of Private-label MBS 22 

2. Sales of Private-label MBS 23 

G. Statutes Governing the Offer and Sale of MBS 23 

III. Current Disclosure Practices 26 

A. General 26 

B. Offering Documents 26 

1. Private-label Offering Materials 26 

2. GSE and Ginnie Mae Offering Materials 28 

C. Post-Offering Disclosures 28 

1. Private-label MBS 28 

2. GSE and Ginnie Mae MBS 29 

D. Particular Issues Addressed by Disclosure 29 

1. Prepayment Risk 30 

2. Credit Risk 30 

E. Types of Disclosures 31 
ii

1. Loan Terms 31 

a. Coupon or Interest Rates on Underlying Loans 31 

b. Loan Maturity Dates and Loan Age 32 

c. Loan Size 34 

d. Points Paid at Settlement 34 

2. Property Information 34 

a. Geographic Distribution 35 

b. Property Types 35 

c. Occupancy Types 35 

d. Loan-to-Value Ratio 36 

3. Borrower Information 37 

a. Credit Scores 37 

b. Loan Documentation 37 

c. Loan Purpose 38 

d. Borrower Debt-to-Income Ratios 38 

4. Sellers, Originators and Servicers 38 

a. Seller Identification 38 

b. Servicer Identification 39 

IV. Information Imbalance Issues 40 

V. Findings 43 

Appendix A A-1 

Appendix B B-1 

 
1 

EXECUTIVE SUMMARY 

 Staff of the Department of the Treasury (“Treasury”), the Office of Federal 

Housing Enterprise Oversight (“OFHEO”), and the Securities and Exchange Commission 

(the “Commission”) formed a joint task force (“Task Force”) in August 2002 to conduct a 

study of disclosures in offerings of mortgage-backed securities (“MBS”). The purpose of 

the joint study was to evaluate current disclosure practices and consider whether 

disclosure enhancements are desirable in assisting investors to make informed investment 

decisions. 

In conducting the study, the Task Force reviewed the history and development of 

the MBS markets, the current disclosure requirements for these securities, and marketdriven industry disclosure practices and standards. The Task Force also interviewed a 

variety of MBS issuers and investors, and other experienced market participants and 

observers, which provided the Task Force with additional perspectives about the 

evolution of the MBS markets, including changing disclosure standards. The Task Force 

received recommendations concerning changes to current disclosure standards based on 

investor needs, and assessments as to the likely impact of additional disclosure on the 

MBS markets’ continued smooth functioning and liquidity. This report contains the Task 

Force’s findings, conclusions, and recommendations regarding enhanced MBS 

disclosures. 

Government sponsored enterprises (“GSEs”) – the Federal National Mortgage 

Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie 

Mac”) – as well as a wholly-owned federal government corporation – the Government 

National Mortgage Association (“Ginnie Mae”) – played a major role in creating the 

MBS markets and today remain the largest issuers. Privately owned financial institutions 

have become increasingly important as issuers in the so-called “private-label” market. 

The MBS markets are estimated to have grown by more than 800% in the past two 

decades. During this time, the structure of MBS vehicles or products – whether issued by 

the GSEs, by Ginnie Mae, or by private-label issuers – has evolved and become 

significantly more complex. MBS investors continue to be almost exclusively 

institutional, but their expressed needs have changed with the evolving market and 

economic conditions. In recent years, investors have focused much more time, attention 

and resources on the evaluation of prepayment risk and, in the case of private label MBS, 

credit risk. 

The Task Force found that the significant degree of evolution in disclosure 

standards in the offer and sale of MBS – whether of GSEs, Ginnie Mae or private-label 

MBS– in the past has been nearly entirely market driven. Market participants 

interviewed by the Task Force indicate that the changes have been considered beneficial 

to the market. 
2

In interviews with the Task Force, MBS market participants also agreed, almost 

without exception, that the significant changes in disclosure did not affect the highly 

liquid nature of the GSE and Ginnie Mae pass-through and to-be-announced markets, and 

MBS markets generally operate reliably and efficiently. Yet, the Task Force also found 

that most market participants with whom it spoke, as well as most lenders and non-GSE 

issuers, believe the MBS markets could function better with additional pool-level 

disclosure. Moreover, consistent with their past experiences with changes in disclosure, 

these market participants expressed confidence that additional pool-level disclosures 

would not have a significant adverse effect on the markets’ liquidity. 

Based on the study, the Task Force has concluded that additional pool-level 

disclosures would be both useful and feasible. Market participants interviewed by the 

Task Force were clear in suggesting additional information that they believed would be 

useful. This report sets forth and describes the most frequently mentioned information 

that market participants recommended be disclosed to supplement currently disclosed 

information. Examples of additional disclosure items that market participants suggested 

would present few practical obstacles are: 

• loan purpose; 

• original loan-to-value ratios; 

• standardized credit scores of borrowers; 

• servicer information; 

• occupancy status; and 

• property type. 

The Task Force believes there are no significant obstacles to the introduction of 

these additional pool-level disclosures and that the benefits of enhanced transparency 

would ultimately outweigh any costs. To implement additional disclosures, the Task 

Force recommends that investor interest and issues of practicality should be key criteria 

used to determine the specific items for additional disclosure in the MBS markets, as well 

as the appropriate timing and method of providing this additional disclosure. In the past, 

industry groups and other market participants have stepped forward to coordinate and 

implement additional disclosures in the MBS market. The Task Force encourages a 

continuation of this approach at this time. If market forces are unable to reach consensus 

on disclosure enhancements, the agencies represented on the Task Force will need to 

consider what additional action might be appropriate. 

In addition to its review of MBS disclosures, the Task Force inquired about 

allegations of selective MBS selling and purchasing practices arising from possible 

information imbalances among market participants. The Task Force looked at policies 

and procedures regarding information barriers at the GSEs. In addition, OFHEO 

reviewed OFHEO examination reports and inquiries of the GSEs as to specific 

allegations. Though questioned by the Task Force about such allegations, interviewees 

provided no evidence to substantiate allegations of improper activity. 
3

The Treasury, the Commission, and OFHEO will, in their separate capacities, 

continue to monitor the MBS markets to assess the implementation and potential impact 

of enhanced MBS disclosures. If future developments warrant, the Task Force members, 

in their separate capacities or jointly as they agree appropriate, could consider what 

additional steps might help provide additional, useful disclosures to MBS investors and 

market participants. 
4

I. INTRODUCTION 

In July of 2002, Treasury, OFHEO and the Commission made a joint 

announcement regarding the intention of Fannie Mae and Freddie Mac to voluntarily 

register their common stock under the Securities Exchange Act of 1934 (the “Exchange 

Act”). This voluntary registration, when in place, will trigger periodic disclosures 

regarding the GSEs. Treasury, OFHEO and the Commission also indicated they would 

review disclosure requirements and practices in the MBS markets, which would not be 

affected under this voluntary registration initiative. The purpose of the review on 

primary offering disclosures for MBS, which culminated in this report, was to examine 

disclosures to all investors in these securities, with a view to enhancing the availability of 

information that investors should have to evaluate the securities in the MBS markets and 

make investment decisions. 

Staff from Treasury, OFHEO and the Commission, acting as the Task Force, have 

conducted the review of the disclosure practices in the MBS markets.1

 The Task Force 

focused on disclosures currently provided by all types of MBS issuers and considered 

whether disclosure improvements were desirable in assisting investors to evaluate 

securities in the MBS markets and make informed investment decisions. 

The Task Force reviewed regulatory disclosure requirements and current industry 

disclosure practices. The Task Force also interviewed Fannie Mae, Freddie Mac and 

Ginnie Mae, private-label issuers, institutional investors, dealers, individual analysts, 

MBS market and real estate finance trade groups, pension funds and others involved in 

the markets to hear their views ranging from evaluations of current markets, how the 

markets function and particular concerns regarding disclosures.2

As background to the Task Force’s findings, the report discusses the development 

and operation of the MBS markets, the various market participants, and the types of MBS 

sold. The report also addresses current disclosure practices and investor interest 

regarding the assets of and structures used for the securitization vehicles, credit and 

repayment sources and other risks affecting the repayment and value of the MBS, and 

information imbalance issues. Finally, the report notes categories of information that the 

Task Force believes would enhance disclosures in the MBS markets. 

 

1

 The Task Force consisted of personnel from the Department of Treasury’s Office of the Under Secretary 

for Domestic Finance and the Office of General Counsel, from OFHEO's Office of General Counsel, Office 

of Policy Analysis and Research and the Office of the Director and from the Commission’s Division of 

Corporation Finance. 

2

 Appendix A lists the market participants who were interviewed. 
5

II. BACKGROUND 

 

The Task Force considered current MBS disclosures in the context of the market’s 

origins and growth, the market’s participants – including issuers, investors and others – 

the structure and risks of MBS, and the current laws governing the offer and sale of such 

securities. Growth in the MBS markets has been significant over the past 20 years. For 

example, single-family MBS grew from less than $367 billion outstanding in 1981 to 

more than $3.3 trillion outstanding at the end of 2001, an 800% increase.3

 During this 

period, MBS have evolved, as have the standard disclosures made to investors. In order 

to understand the reasons for evaluating disclosure practices in the MBS markets, it is 

helpful to understand the development and operation of the MBS markets. 

As described in this section, the MBS markets consist primarily of the MBS 

issued or guaranteed by two government-sponsored enterprises, Fannie Mae and Freddie 

Mac, and one United States-owned corporation, Ginnie Mae. MBS are also issued by 

private-label issuers, which are private institutions. The GSEs and Ginnie Mae guarantee 

payments on their respective MBS, whereas private-label issuers use various forms of 

credit enhancement. 

The most commonly issued MBS are pass-through securities, which consist 

almost entirely of GSE and Ginnie Mae MBS, and REMICs, which are the primary 

security issued by private-label issuers. The MBS investor base has evolved, but remains 

largely institutional. The most important risks in the MBS market are prepayment risk 

and credit risk.4 Investors perceive these risks differently depending on whether the 

issuer (or guarantor) is a GSE, Ginnie Mae, or private-label issuer, due to the different 

underlying mortgage loans and credit structures. This section includes a discussion of 

how these risks drive disclosures in the MBS markets. Other sections of this report 

discuss whether MBS disclosures can be enhanced. 

A. Issuers

Fannie Mae, Freddie Mac, and Ginnie Mae were all created by federal law to 

address perceived deficiencies in the U.S. housing finance market.5 The statutory 

 

3

 2 INSIDE MORTGAGE FINANCE PUBLICATIONS, INC., THE 2002 MORTGAGE MARKET STATISTICAL 

ANNUAL, 107 (2002). 4

 Interest rate risk, among other market risks, is another important risk for MBS investors to consider. 

However, because interest rate risk is not a disclosure issue specific only to the MBS, it is not separately 

addressed in this report. 

5

 The enactment in 1934 of the National Housing Act established the Federal Housing Administration 

(“FHA”), which was to provide for the insurance of home mortgage loans made by private lenders in order 

to help facilitate home ownership. This statute also provided for the chartering of national mortgage 

associations. The only association ever formed, the National Mortgage Association of Washington, was 

created in 1938 and eventually became known as Fannie Mae. In 1968, Fannie Mae was split into two 

entities. One part retained the name Fannie Mae, was separated from FHA and became an investor-owned 

company. The other part, Ginnie Mae, became a wholly-owned government corporation within the 

auspices of the Department of Housing and Urban Development. In 1970, Congress passed the Emergency 

Home Finance Act of 1970 (12 U.S.C.§§ 1451-1459), chartering Freddie Mac. Freddie Mac was originally 
6

purposes of the GSEs and Ginnie Mae are to facilitate a secondary market for residential 

mortgage loans and to enhance liquidity in such loans. The GSEs and Ginnie Mae 

enhance liquidity by enabling lenders and originators to sell their mortgage loans and use 

the proceeds from the sales to make new mortgage loans. 

Fannie Mae was originally authorized only to buy FHA insured loans. After being 

split into two entities in 1968, Fannie Mae and Ginnie Mae, Fannie Mae was authorized 

to buy a broader range of loans. Freddie Mac was initially authorized to purchase 

conventional mortgages from federally insured financial institutions. Both Fannie Mae 

and Freddie Mac are now investor owned companies, and the common stock of both 

companies is traded on the New York Stock Exchange. 

In 1992, OFHEO was established as an independent entity within the United 

States Department of Housing and Urban Development by the Federal Housing 

Enterprises Financial Safety and Soundness Act of 1992.6

 OFHEO’s primary mission is 

ensuring the capital adequacy and financial safety and soundness of Fannie Mae and 

Freddie Mac. 

Ginnie Mae does not buy or sell loans or issue MBS; instead, it guarantees 

payment on MBS that are backed by federally insured or guaranteed loans, mostly loans 

insured by the FHA and guaranteed by the Department of Veterans Affairs (the “VA”). 

Other guarantors or insurers of loans eligible as collateral for Ginnie Mae MBS include 

other offices in the Department of Housing and Urban Development (“HUD”), and the 

Department of Agriculture’s Rural Housing Service. Ginnie Mae is a wholly-owned 

government corporation under the auspices of HUD. 

Private-label issuers include commercial banks, savings associations, mortgage 

companies, investment banking firms and other entities that acquire and package 

mortgage loans for resale as MBS.7

B. MBS Investors

The types of investors in MBS have changed over time. Initially the primary 

purchasers of MBS were thrift institutions, commercial banks, insurance companies, 

pension funds, and mutual funds. More recently Fannie Mae, Freddie Mac, and 

international institutions have also become much more active market participants.8

 The 

 

capitalized by the Federal Home Loan banks and controlled by the Federal Home Loan Bank Board. It was 

restructured under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and is now 

wholly-owned by private investors. 

6

 See 12 U.S.C. §§4501-4641. 7

 See KENNETH G. LORE & CAMERON L. COWAN, MORTGAGE-BACKED SECURITIES; DEVELOPMENTS AND 

TRENDS IN THE SECONDARY MARKET 2-39 (2001). 8

 The GSEs together hold more MBS than any other individual investors in the market. The GSEs 

generally hold MBS in their portfolios until they mature. Banks hold more aggregate whole loans and 

MBS combined than the GSEs do. See Guide to US Mortgage Backed Securities, MBS RESEARCH

(Deutsche Bank)(Jan. 2002) at 10 [hereinafter Deutsche Bank Report].
7

investor base remains overwhelmingly institutional. Investments in MBS are made for a 

variety of reasons. Some investors purchase MBS to hold long-term in portfolios while 

others purchase for short term trading purposes. MBS are also widely used for hedging 

purposes. Much of the development of GSE, Ginnie Mae, and private-label MBS 

markets has been in direct response to investor interests and demands. 

C. Mortgage-Backed Securities

The MBS market as we know it today can be traced back to 1970, when Ginnie 

Mae first guaranteed a pool of mortgage loans. The creation of Freddie Mac in 1970 

helped to expand the market.9

 Freddie Mac issued its first mortgage-backed participation 

certificates in 1971, and Fannie Mae issued its first MBS in 1981.10 Private-label MBS 

issuance began in 1977 when Bank of America engaged in the first private-label issuance 

of interests in a trust that held single-family mortgages.11 There was little private-label 

issuance from 1977 until the early 1980s.12

In the basic MBS structure, a group of mortgage loans is sold to a trust or other 

investment vehicle. In the case of residential home mortgages, the pools usually include 

a large enough number of loans so that information on no one loan is important in 

analyzing the pool. The investment vehicle owns the mortgage loans, issues securities 

that are either backed by or represent interests in the loans, and makes payments to 

investors out of the payments made on the loans. A servicer is hired to collect the 

mortgage payments from the borrowers and to pass the payments, less fees, including 

guarantee and trustee fees, through to the trustee, who passes these payments on to the 

investors that hold the MBS. 

To facilitate sales of MBS, the GSEs and Ginnie Mae are authorized to guarantee 

the MBS. Thus, if for some reason, there is insufficient money to cover the payments 

due on the MBS, the GSEs make the payments due on the MBS. Ginnie Mae’s guarantee 

arises if the issuer (typically the loan originator) does not make the delinquent payments 

to the MBS holders. Unlike Fannie Mae and Freddie Mac, which are permitted to issue, 

as well as guarantee the payments on, MBS, Ginnie Mae only guarantees the payment of 

MBS that are created by private entities. Ginnie Mae’s guarantee of the payment of MBS 

 

9

 See LORE & COWAN, supra note 7 at 1-10. 10 See Linda Lowell, Mortgage Pass-Through Securities in THE HANDBOOK OF MORTGAGE-BACKED 

SECURITIES 25, 29 (Frank Fabozzi ed., 5th ed. 2001); Freddie Mac, Key Corporate Statistics (visited Dec. 

12, 2002) < http://www.freddiemac.com/corporate/news/corp_stats.html>; Federal National Mortgage 

Association, SEC No-Action Letter (Nov. 7, 1977). See also Leland Brendsel, Securitization’s Role in 

Housing Finance: The Special Contributions of the Government Sponsored Enterprises in A PRIMER ON 

SECURITIZATION 17, 17-29 (Leon T. Kendall et al. eds., 1997). 11 See Bank of America Nat’l Trust & Savings Association, SEC No-Action Letter (Apr. 19, 1977). See 

generally Edward L. Pittman, Economic and Regulatory Developments Affecting Mortgage Related 

Securities, 64 NOTRE DAME L. REV. 497, 499 (1989). 12 See LORE & COWAN, supra note 7, at 1-11;. Joseph Philip Forte, Capital Markets Mortgage (Apr. 1999)) 

<http://www.capitalconsortium.org/docs/capmarkm/htm>(“While some isolated Private Label MBS 

issuance occurred in the late 1970s, non-GSE securitization of whole loans did not gain momentum until 

the thrift industry crises in the high interest rate environment of the early 1980s.”). 
8

is backed by the full faith and credit of the United States, whereas the guarantee 

obligations of Fannie Mae and Freddie Mac are not. 13

There are significant differences in the composition and structure of typical 

private-label MBS compared to MBS issued or guaranteed by the GSEs or Ginnie Mae. 

The perceived strength of the guarantees, the evolution of tax law, and the demands of 

investors in an increasingly complex marketplace have contributed to current practices 

and product distinctions between GSE and Ginnie Mae MBS and private-label MBS. A 

number of regulatory and tax constraints initially impeded private entities from 

expanding into the MBS market created by the GSEs and Ginnie Mae. 

1. Secondary Mortgage Market Enhancement Act of 1984

Many of the regulatory constraints affecting private entities were removed in 

1984 with the passage of the Secondary Mortgage Market Enhancement Act of 1984 

(“SMMEA”). SMMEA was intended to encourage private sector participation in the 

secondary mortgage market by, among other things, relaxing certain regulatory burdens 

that affected the ability of private-label issuers to sell their MBS.14 For example, 

SMMEA allowed state and federally regulated financial institutions to invest in privately 

issued mortgage related securities. 

2. Effect of Tax Laws on MBS Markets

 

Tax law constraints also affected the types of MBS that could be sold. Until the 

passage of the Tax Reform Act of 1986 (“1986 Tax Act”), which recognized the Real 

Estate Mortgage Investment Conduit (“REMIC”) structure with its beneficial tax 

treatment, most MBS were sold as “pass-through” securities. As discussed below, passthrough securities pay an investor principal and interest received from payments on the 

mortgage loans that are the assets of the trust. The payments on the mortgage loans are 

passed through the trust to the investors as they are made. 

Before 1986, the effect of the limitation on activity of grantor trusts under the tax 

laws restricted the use of trusts with multiple classes of securities with differing payment 

characteristics. In the multi-class structure, the principal and interest payments are not 

 

13 Payments on mortgage loans underlying Ginnie Mae MBS are federally insured or guaranteed. 

 Although the obligations of Fannie Mae and Freddie Mac are not federally guaranteed, a number of 

special statutory provisions have had the effect that lenders and investors provide the GSEs more ready 

access to lower cost funding than other issuers. Among these provisions are congressional charters, 

exemption from state and local income taxes, treatment of GSE securities as government securities under 

federal securities laws and the authority of the Secretary of the Treasury to purchase up to $2.25 billion of 

securities from each of Fannie Mae and Freddie Mac. See also the Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992, 12 U.S.C. § 4501. 

14 The legislation was aimed at encouraging participation in the secondary mortgage market by investment 

banks, investment entities, mortgage bankers, private mortgage insurance companies, pension funds and 

other investors, depositary institutions and federal credit unions. See LORE & COWAN, supra note 7, at 1-

14. See also Pittman, supra note 11; infra note 64. 
9

just passed through pro rata as paid to all investors, but rather are divided into varying 

payment streams to create classes with different expected maturities, different levels of 

seniority or subordination or other differing characteristics. Prior to 1986, the tax law 

treated these multi-class trusts as associations taxable as corporations, and distributions 

would have been taxable at the trust level and also at the trust investor level. This 

“double taxation” made multi-class structures generally unfeasible. 

The 1986 Tax Act eliminated the double taxation for multi-class vehicles 

structured as REMICs. With the advent of the REMIC, more complex structures with 

multiple classes were developed which divided up the payment streams on the mortgage 

loans that were collateral for the securities repayment obligations to investors. 

3. Types of Underlying Mortgage Loans

There are differences between the GSE and Ginnie Mae MBS and private-label 

MBS in the composition of the mortgage loans comprising the collateral for the 

respective pools. The types of underlying mortgage loans that are eligible to be included 

in GSE and Ginnie Mae MBS affect the composition of pools backing private-label MBS 

because originators can generally receive the best price for eligible loans in GSE and 

Ginnie Mae transactions. 15 Eligibility is not the sole criterion, however. Because the 

GSEs require a higher fee to accept some loans of lesser credit quality, sometimes 

originators may find a private-label transaction more attractive. 

The mortgage loans included in Fannie Mae and Freddie Mac MBS generally 

have the following characteristics: 

• mortgages are on residential properties, most commonly one to four 

family homes (these are referred to as single family loans); 

• mortgages are generally 15 year and 30 year maturities that are fully 

amortizing;16

• most mortgage loans are fixed rate;17

• most mortgages have monthly payments; 

• there typically are no prepayment penalties; 

• the loans are due on sale of the underlying property and cannot be 

assumed by the buyer of the property;18

• mortgage loans must be within the “conforming loan limit”, which for 

one-unit homes in 2003 is $322,700.19

 

15 See Lowell, supra note 10, at 31-32 (“Normally it is more profitable for originators of conforming 

loans... to use the agency programs”). 

16 There are some 10 year, 20 year and balloon (not fully amortizing or short maturity) loans, among 

others, that are securitized as well. 

17 There are also adjustable rate mortgages that can be securitized as Fannie Mae or Freddie Mac MBS. 18 FHA and VA loans that might be part of a Ginnie Mae security can be assumed by a subsequent buyer of 

the property. 

19 A loan that is a single-family loan within the loan limit that is set annually for Fannie Mae and Freddie 

Mac is said to be within the conforming loan limit. There is no similar limit on the size of loans guaranteed 
10

• loans within the conforming loan limit generally satisfy other GSE 

specifications for loan documentation, credit information and property 

type, among other requirements.20

There are some mortgage loans made to borrowers with good credit histories that 

are within the conforming loan limit but do not satisfy all the standard GSE underwriting 

guidelines, including documentation, for mortgage loans. These mortgage loans are 

called “Alternative A” or “Alt A” loans. These Alt A loans fail to satisfy the GSE 

guidelines for reasons such as limited or low documentation of income from the borrower 

(for reasons of speed or convenience to the borrower), unstable income sources, higher 

loan-to-value ratios (“LTV”) or other ratios of payments to income.21

Alternative A loans and some lower credit quality loans that are within the 

conforming loan limit can be swapped for Fannie Mae or Freddie Mac MBS or pooled 

and sold as private-label MBS. Fannie Mae or Freddie Mac will issue MBS backed by 

such loans if the lender pays a higher guarantee fee that compensates the GSE for the 

potentially higher risk. 

Apart from Alt A loans, there are other types of mortgage loans that do not satisfy 

standard GSE requirements. Mortgage loans that are larger than the conforming loan 

limit, called jumbo loans, cannot, by statute, be included in GSE or Ginnie Mae MBS 

pools. Mortgage loans are also made to borrowers who fail to meet GSE underwriting 

requirements because of certain borrower or loan characteristics. For example, mortgage 

loans made to borrowers with poor credit histories or high debt-to-income ratios may be 

ineligible for securitization by the GSEs or eligible only by payment of a higher 

guarantee fee. These are the types of loans that typically comprise the pools backing the 

private-label MBS. 

Under the Ginnie Mae MBS program, HUD-approved mortgage originators pool 

FHA, VA or certain other federally-insured mortgages into MBS and sell the MBS 

guaranteed by Ginnie Mae. The terms of the underlying mortgage loans must comply 

with the underwriting requirements of the FHA or VA, as applicable. 

As a result of the GSE underwriting criteria and conforming loan limits and FHA 

and VA underwriting requirements which do not apply to private-label issuers, the 

mortgage loans in private-label MBS generally have more diverse collateral, credit risk or 

other underwriting characteristics than GSE or Ginnie Mae MBS and have wider 

variances in a number of terms including interest rate, term, size, purpose and borrower 

characteristics. Private-label pools more frequently include second mortgages, high loan-

 

by Ginnie Mae, but the underwriting guidelines of the federal housing programs may directly or indirectly 

establish such limits. For example, the FHA has an established maximum family home mortgage limit of 

$280,749. U.S. Department of Housing and Urban Development, HUD Announces Higher FHA Home 

Loan Limits to Help More American Families Become Homeowners (last modified Jan. 2, 2003) 

<http://www.hud.gov/news/release.cfm?content=pr03-001.cfm>. 20 See generally Deutsche Bank Report, supra note 8 at 8. 21 See FRANK J. FABOZZI & JOHN N. DUNLEVY, REAL ESTATE-BACKED SECURITIES 98-99 (2001). 
11

to-value mortgages and manufactured housing loans. The coupon rates and maturities of 

the underlying mortgage loans in a private-label MBS pool may vary to a greater extent 

than those included in a GSE guaranteed pool. 

4. Guarantees or Credit Enhancement

 As noted above, the GSEs and Ginnie Mae guarantee payments to investors on 

their MBS. This guarantee ensures that investors receive scheduled payments of 

principal and interest, regardless of whether payments on the underlying mortgages are 

made. MBS issued in the private-label market are typically not guaranteed by the issuer 

and instead rely on other forms of credit enhancement or support to give investors greater 

assurance they will receive payments on their MBS. The credit enhancement in privatelabel MBS may be internal or external to the vehicle issuing the security. External credit 

enhancements generally involve insurance or a letter of credit purchased by private-label 

issuers to support the underlying mortgage payments.22 Internal credit supports, reserve 

funds, or senior-subordinated structures are structural features of multi-class MBS, such 

as REMICs, that are designed to help ensure repayment to more senior classes of 

securities before other subordinated classes in the case of default of the underlying 

mortgage loans.23

The most common credit enhancement currently used in private-label MBS is the 

senior-subordinated structure in REMICs. In the senior-subordinated credit 

enhancement, the trust will issue different classes of securities. There will be a senior 

class or tranche and at least one class that has a subordinated right of payment to the 

senior class. The senior class, which bears the least amount of risk of default of the 

underlying mortgages, will carry a lower interest rate. The subordinated class, which 

bears the greatest amount of risk of default of the underlying mortgage loans, will carry a 

higher interest rate in order to compensate for the greater risk exposure. The level of 

credit protection this structure provides to the senior class may decline over time due to 

prepayments and thus other mechanisms, such as prepayments going disproportionately 

to the senior class (known as shifting interest structures), must be in place to provide 

further safeguards.24 Because the senior-subordinated credit enhancement relies on a 

multi-class security structure, this form of credit enhancement is typically available for 

REMIC or other multi-class MBS, and not pass-through MBS. 

5. Risks – Prepayment and Credit

a. Prepayment Risk

The most significant feature and risk that all MBS share is prepayment risk, which 

is the risk that principal payments on an underlying loan will be paid earlier or later than 

 

22 See Frank J. Fabozzi et al., Nonagency CMOs in THE HANDBOOK OF MORTGAGE-BACKED SECURITIES, 

supra note 10, at 267, 268. 23 See Id. at 268-69. 24 See FABOZZI & DUNLEVY, supra note 21, at 73. 
12

expected. Unscheduled prepayments may affect the return realized by MBS investors. 

When an investor purchases an MBS or any other fixed income security, the investor 

does so with the understanding that the price he or she is paying for the security reflects 

uncertainty about its expected life. Prepayment risk on MBS is influenced by a wide 

range of factors that relate both to general market conditions, including interest rates, and 

the performance on individual loans included in the portfolio of loans backing an MBS 

issuance. 

Prepayments arise for two primary reasons – refinancing and moving. As interest 

rates fall below rates on existing mortgages, borrowers may, and commonly do, prepay 

their existing loans and refinance at lower rates. Refinancings are recognized as being 

the primary driver of prepayments.25 Prepayments also occur when homeowners sell 

their homes. Most mortgage loans must be paid in full when a home is sold. The 

mortgage loan can also be paid prior to its due date or maturity if the homeowner does 

not pay the loan and the lender repossesses or forecloses on and sells the home. Finally, 

a borrower may prepay a loan, in whole or in part, at any time for any other reason. 

When MBS prepay as a result of borrower refinancing, investors seeking to reinvest in 

the fixed income market will generally be forced to make a new investment in a lower 

interest rate environment. When prepayments are slower than expected, it often means 

that interest rates have risen. The security pays later than expected, and the investor 

cannot take advantage of more attractive investment opportunities with those funds.26

b. Credit Risk

The potentially significant risk to investors in private-label MBS that is generally 

thought by investors to be less significant in the case of GSE and Ginnie Mae MBS is 

credit risk. Investors in MBS, as with other fixed income instruments, evaluate the risk 

of whether they will receive the scheduled payments of principal and interest on their 

MBS. Credit risk reflects the risk that the borrowers on the underlying loans may not be 

able to make timely payments on the loans or may even default on the loans. 

In the absence of a guarantee or external credit enhancement, MBS investors 

generally can look only to the assets or collateral of the trust, the underlying mortgage 

loans, as the source of payments on their securities and to the structure of the transaction 

for any internal credit enhancement. The creditworthiness of the underlying borrowers 

becomes significantly more relevant in private-label MBS offerings because there is 

seldom an entity that is guaranteeing the payment of the securities. Therefore, if the 

borrowers do not pay the mortgage loans, the MBS securities will not pay, absent some 

credit enhancement. Consequently, GSE and Ginnie Mae MBS and the private-label 

MBS may pose differing degrees of risk for investors. 

 

25 See Michael Bykhovsky, Overview of Recent Prepayment Behavior and Advances in Modeling in THE 

HANDBOOK OF MORTGAGE-BACKED SECURITIES, supra note 10, at 365, 372. 26 See LORE & COWAN supra note 7, at 3-5; Lowell, supra note 10, at 35-42. 
13

Since the GSEs and Ginnie Mae guarantee the timely payment of principal and 

interest on the MBS, a GSE and Ginnie Mae MBS investor looks to the GSEs and Ginnie 

Mae to determine the credit risk. Ginnie Mae’s guarantee is the full faith and credit 

guarantee of the United States. In contrast, Fannie Mae’s and Freddie Mac’s guarantees 

are based solely on their own credit quality. Fannie Mae and Freddie Mac provide 

extensive corporate disclosure and will soon register their common stock under the 

Exchange Act, subjecting the two companies to all of the disclosure requirements of the 

federal securities laws. Investors in Fannie Mae and Freddie Mac MBS may look to 

these disclosures to assess those companies’ abilities to fulfill the guarantees of the MBS. 

Investors may also look to information provided by OFHEO about the GSEs’ 

creditworthiness, including results of examinations and risk based capital stress tests. 

In addition to assessing the credit quality of the underlying mortgage loans, 

investors in private-label MBS must look to the creditworthiness of the provider of the 

external credit enhancement or must evaluate the reliability of the transaction structure to 

provide any internal credit enhancement and the reliability of a rating agency’s rating. 

The amount of disclosure private-label issuers must provide with respect to third party 

credit enhancements varies with the type and level of support expected. Private-label 

issuers are required to discuss in their registration statements the material terms of any 

credit enhancement, whether internal or external and to provide information regarding the 

credit enhancer, insurer or guarantor.27

D. Structure of the MBS

As noted above, the most common form of private-label MBS is in the form of a 

REMIC. The other common form of MBS is the pass-through security, which is used 

predominantly by the GSEs and Ginnie Mae. Both structures are briefly summarized 

below. 

1. Pass-Through Securities

The most common type of MBS is a pass-through security backed by a pool of 

single-family mortgage loans. Generally, pass-through MBS are created by pooling or 

packaging mortgage loans together in a trust or other collective investment vehicle and 

selling the interests in the trust.28 In the pass-through structure, the certificate holders 

 

27 For example, where insurance is obtained on the pool backing the private-label MBS, the material terms 

of the insurance or guarantee and information on the insurer or guarantor must be described in the 

prospectus supplement. If the pool insurance or other third party credit enhancement insures or guarantees 

payments on 20% or more of the cash flows of the MBS vehicle, the registration statement must include 

audited financial statements of the party providing the insurance or credit enhancement. If the third party 

enhancement is a guarantee of the MBS rather than the pool cash flows, the guarantee is also a security that 

either must be registered under the Securities Act or exempt from registration. The insurance itself is 

exempt from registration under the Securities Act under Section 3(a)(8). See 15 U.S.C. § 77c(a)(8). Even 

if the guarantee or insurance is exempt from registration, disclosure relating to the financial condition of the 

guarantor is required. 

28 “Pass through certificates generally are treated as a sale of the mortgage loans to the holders of the 

participation certificates for tax and accounting purposes.” LORE & COWAN, supra note 7, at 3-9. 
14

own undivided interests in the pool. All payments on the underlying mortgage loans, 

including principal, scheduled interest, and unscheduled prepayments are passed through, 

on a pro rata basis, to the holders of the pool interest or participation certificates after 

deducting the servicing fees, Ginnie Mae and GSE guarantee fees, and trust expenses. 

The assets of the trust or other vehicle are the mortgage loans in the pool. Most passthrough vehicles own fixed rate mortgages, although adjustable rate mortgages may also 

be assets of a pass-through MBS entity.29 The coupon or interest rate payable on a passthrough MBS is less than the interest rate payable on the underlying mortgage loans in 

the pool. The interest differential is used to pay for the guarantee fee to one of the GSEs 

and the servicing fee to the servicer. Generally, the underlying mortgage loans are 

serviced by the originating lender or another institution that has bought the servicing 

rights.30

Private-label issuers can, but in most cases do not, issue pass-through securities. 

In a private-label MBS, the interest differential would be used to pay for credit 

enhancement or credit support, the servicing fee to the servicer, and trust expenses. 

2. REMICs

As previously noted, the REMIC is a multiple-class security vehicle that does not 

have the burden of double taxation. The assets underlying the REMIC securities can be 

either other MBS or whole mortgage loans. The assets are pooled and cash flows from 

the assets are distributed to the various REMIC security classes according to the priorities 

specified in advance. The REMIC structure allows issuers to create securities with short, 

intermediate and long-term maturities. This flexibility enables issuers to expand the 

market for the MBS to fit the needs of a variety of investors, not just investors looking for 

30-year fixed-rate securities. The REMIC structure has allowed for a broader group of 

investors. REMICs may also be used to address particular investment objectives or 

concerns about prepayment risk by carving up principal and interest payments on the 

underlying mortgage loans to create different timing and levels of payments on the 

securities.31

REMICs are issued by private-label issuers and under the GSE and Ginnie Mae 

programs. Fannie Mae and Freddie Mac REMICs generally are backed by GSE MBS. 

 

29 Fannie Mae, Freddie Mac and Ginnie Mae issue pass-through MBS backed by adjustable rate 

mortgages. See Fannie Mae, Understanding Fannie Mae MBS (visited Dec. 12, 2002) 

<http://www.fanniemae.com/markets/mbssecurities/about_mbs/understanding_mbs/mbs_selecting.jhtml?p

=Mortgage-Backed+Securities&s=Understanding+Fannie+Mae+MBS&t=Selecting+an+MBS 

+Investment>; Freddie Mac, About PCs (visited Dec.12,2002)<http://www.freddiemac.com/mbs/html/aop 

_gold.html>. 

30 “The servicer collects all payments of principal and interest from individual mortgagors and is 

responsible for enforcing payment of delinquent loans and reporting to the security holders.” LORE &

COWAN, supra note 7, at 3-9. There appears to be a growing trend toward unbundling the servicing 

activities from the loan origination activities and consolidation within the servicing industry. See id. 31 See generally Lehman Brothers Inc. Mortgage Research Group, Collateralized Mortgage Obligations in

THE HANDBOOK OF MORTGAGE-BACKED SECURITIES, supra note 10, at 169, 169-196. 
15

The GSEs then guarantee the payment obligations on the REMIC securities. In the 

Ginnie Mae REMIC program, Ginnie Mae guarantees the timely payment of principal 

and interest on each of the classes. Ginnie Mae REMICs are pools of Ginnie Mae 

guaranteed certificates. 

Due to the widely diverse coupon and payment characteristics of the underlying 

mortgage loans, most private-label securities are structured as REMICs.32 Private-label 

REMICs are generally backed by jumbo or otherwise non-conforming mortgage loans. 

The GSE participation in the REMIC market has effectively priced most potential 

private-label REMIC securities backed by conforming loans out of the market. This is 

because, as a result of the GSE or Ginnie Mae guarantee, investors will likely pay more 

for GSE and Ginnie Mae securities backed by the same loans, even though guarantee fees 

are paid from the pool cash flows. 

In a standard REMIC structure, known as sequential pay, each class or tranche of 

the security is generally paid the coupon rate on a monthly basis. Principal is paid on the 

regular classes in sequential order: senior classes are paid first, and then the subordinated 

classes. Any prepayments are allocated in the same way. The effect of prepayments is 

that more senior classes may be paid off much sooner or later than anticipated. 

Prepayments to senior classes can also shorten the expected maturities of later maturity 

classes in a sequential pay structure, but later maturities have less prepayment risk than 

exists for securities in a pass-through structure. 

E. Creation and Sales of GSE and Ginnie Mae MBS

1. Creation of GSE and Ginnie Mae MBS

GSE and Ginnie Mae MBS are created through a variety of programs. For Fannie 

Mae and Freddie Mac guaranteed MBS, each GSE has two basic mechanisms to create 

MBS – a “cash” program and a “swap” program. A mortgage originator selects a group 

of mortgage loans that it determines to sell to one of the GSEs as a package. Under the 

“swap” programs, the lender selects and pools a group of conforming mortgage loans that 

meet the GSE underwriting standards and “swaps” them for MBS issued and guaranteed 

by one of the GSEs representing interests in that same pool of mortgages. Under their 

“cash” programs, Fannie Mae and Freddie Mac take whole mortgage loans and give the 

originators cash back. Subsequently, the GSE will decide which mortgages out of the 

pools it has purchased in the cash program to pool and use as collateral for new GSE 

MBS or whether to hold the mortgage loans as an investment. The GSE will then issue 

MBS backed by the loans it has purchased from lenders or originators, guarantee the 

timely payment of principal and interest on the securities and sell the MBS through 

dealers. The mortgage originator, not the GSE, decides whether to swap the loans for 

MBS or to receive cash. A small amount of Fannie Mae and Freddie Mac MBS are 

created through their respective “cash” programs, with the vast majority being created 

 

32 See FABOZZI & DUNLEVY, supra note 21, at 65-66. 
16

through their respective “swap” programs. The loan originator, of course, would also be 

free to use the loans in a private-label MBS issuance. 

Under the Ginnie Mae MBS program, a HUD-approved mortgage loan originator 

pools FHA, VA or certain other federally-insured mortgages and sells MBS guaranteed 

by Ginnie Mae. Ginnie Mae does not issue securities or own the underlying assets but 

rather guarantees the payment of the securities backed by the underlying mortgage loans 

or mortgage pools. Like the loans in the Fannie Mae and Freddie Mac swaps, the loans 

in the mortgage pools comprising Ginnie Mae guaranteed MBS are chosen by the lender, 

not by Ginnie Mae.33 Ginnie Mae has pool and disclosure guidelines establishing the 

permissible content of the pools and required disclosures including the number of issuers, 

first payment date, maturity, and number of loans.34

The GSEs have other MBS products that are either larger pass-through structures, 

which can be pools of pools (small balance pools consolidated into one larger pool) or are 

collateralized mortgage obligations such as REMICs. 

2. The To-Be-Announced Market

In addition to the differences in the collateral and structures discussed above, 

private-label MBS are sold to investors through different market mechanisms than are 

GSE and Ginnie Mae MBS.35

Most pass-through MBS of each of Fannie Mae, Freddie Mac and Ginnie Mae are 

eligible to be sold in the “to-be-announced” or TBA market, which is essentially a 

forward or delayed delivery market.36 Only pass-through securities issued or guaranteed 

by Fannie Mae, Freddie Mac or Ginnie Mae and comprised of single-family mortgages 

are eligible for trading in the TBA market. The TBA market allows mortgage lenders 

essentially to sell the loans they intend to fund even before the loans are closed. This also 

allows the lender to lock in an interest rate for the borrower. The lender, or other market 

 

33 See LORE & COWAN, supra note 7, at 2-6. 34 Ginnie Mae has two basic types of securities: Ginnie Mae I and Ginnie Mae II. The Ginnie Mae I 

product is comprised only of pools formed by a single issuer, pays principal and interest separately on the 

certificates, and the underlying mortgages have the same interest rate. The Ginnie Mae II product may 

have pools formed by single or multiple issuers, has an aggregate principal and interest payment on the 

certificates, and the interest rates on the underlying loans may vary within a specified percentage range. 

35 While historically the MBS market has been a dealer to dealer or dealer to customer market with trades 

occurring based on telephone discussions and fax, the growth of electronic trading platforms has impacted 

the TBA market. The growth of these electronic trading platforms has been noted to result in greater 

transparency in TBA pricing as well as improved efficiency and accessibility. The interdealer market now 

depends heavily on electronic trading. In 2002 there were 12 electronic systems that covered the MBS 

market. See The Bond Market Association, e-Commerce in the Fixed Income Markets – The 2002 Review 

of Electronic Transaction Systems, at 4-7 (last modified Nov. 2002)<http://www.bondmarkets.com/ 

research/ETSRpt1102.pdf>. 

36 Other GSE MBS, including REMICs are sold in the same manner as other fixed income instruments in 

the over the counter market, which involves dealer to dealer or dealer to investor communications and 

negotiation through interdealer screens, by telephone, e-mail or fax. 
17

participant, will enter into a forward contract to sell MBS in the TBA market, promising 

to deliver MBS on the settlement date sometime in the future. In the TBA market, GSE 

and Ginnie Mae MBS are traded on a forward or delayed delivery basis with settlement 

up to 180 days later. The actual mortgage pools comprising the MBS are not specified at 

the time of sale. In fact, many of the mortgage loans may not even be signed (and the 

mortgage pools created) at the time of sale. The largest volume of trading in the TBA 

market is for settlement within 30 days.37

In a TBA trade the seller and buyer agree to five pieces of information before 

entering into the transaction: the type of security, which will usually be a certain type of 

Fannie Mae, Freddie Mac or Ginnie Mae program and type of mortgage (i.e., GNMA 30-

year pass-throughs); coupon or interest rate; face value (the total dollar amount of MBS 

the purchaser wishes); price; and settlement date. The purchaser will contract to acquire 

a specified dollar amount of MBS, which may be satisfied when the seller delivers one or 

more MBS pools at settlement. Forty-eight hours before settlement, the seller specifies 

or allocates the identity and number of mortgage pools by the specific pool numbers and 

CUSIPs to be delivered to satisfy the TBA trade. 

The Bond Market Association, a private trade association of dealers in debt 

securities, publishes guidelines governing the mechanics of trading and settling MBS, 

which are intended to implement standard industry practices. The guidelines, titled 

“Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and 

Other Related Securities,” contain specific guidelines for trading and settling GSE and 

Ginnie Mae pass-through MBS in the TBA market, known as Good Delivery 

Guidelines.38 The Good Delivery Guidelines outline the basic terms and conditions for 

trading, confirming, delivering and settling MBS. The Good Delivery Guidelines set 

forth the basic characteristics that GSE and Ginnie Mae pass-through MBS must have to 

be able to be delivered to settle an open TBA transaction. Most newly issued GSE and 

Ginnie Mae pass-through MBS are eligible to be sold in the TBA market. Already 

outstanding GSE and Ginnie Mae pass-through MBS may also be used to cover a TBA 

trade. Therefore, the mortgage originator has until 48 hours before the settlement date to 

decide whether to use new pools of mortgages or to buy outstanding GSE or Ginnie Mae 

MBS to cover the trade. The Task Force understands that roughly 75% of GSE and 

Ginnie Mae MBS are eligible to trade in the TBA market.39

 

37 See generally Jeffrey Biby, Srinivas Modukuri & Brian Hargrave, Trading, Settlement and Clearing 

Procedures for Agency MBS in THE HANDBOOK OF MORTGAGE-BACKED SECURITIES, supra note 10, at 

105, 105-14. 

38 See THE BOND MARKET ASSOCIATION, UNIFORM PRACTICES FOR THE CLEARANCE AND SETTLEMENT OF 

MORTGAGE-BACKED SECURITIES AND OTHER RELATED SECURITIES (1990) [hereinafter UNIFORM 

PRACTICES]. Fixed Income Clearing Corporation, the successor to the MBS Clearing Corporation, a 

clearing agency registered with the Commission, provides clearing and settlement services for GSE and 

Ginnie Mae MBS transactions. 

39 Trading is done by phone, fax or online. Online or other electronic sites openly display bids, thus 

making the trade process more transparent. An increasing amount of GSE and Ginnie Mae MBS are being 

traded online. According to the Bond Market Association, approximately, $69 billion of GSE MBS are 

traded every day including $20 billion to $25 billion of TBAs. Of these, TradeWeb, an online trading 

platform, estimates that nearly $3 billion of those TBAs are traded on its platform, which lets institutions 
18

The Good Delivery Guidelines were developed as a result of the unique nature of 

the GSE and Ginnie Mae MBS market. The TBA market developed in response to the 

demands of market participants for more liquidity in trading GSE and Ginnie Mae MBS. 

In order for the market to work on a delayed delivery basis, with sales of GSE and Ginnie 

Mae MBS occurring before the underlying mortgage loans close, and to account for the 

potential that not all commitments for mortgage loans will close (called pipeline risk), the 

market had to develop a process that would allow the identification of the securities that 

would be delivered in satisfaction of a trade a very short time before settlement, rather 

than at the time the forward trade was entered into. In addition, because there are over 1 

million individual GSE and Ginnie Mae MBS, with huge variations in outstanding 

principal amount, it was recognized that it was impractical and inefficient, and would 

greatly limit liquidity, and generally reduce price, to attempt to trade these GSE and 

Ginnie Mae MBS on a pool-by-pool basis. Thus, it was essential to establish a concept of 

fungibility or interchangeability among pools that would facilitate both forward trading 

and an orderly and liquid trading market in GSE and Ginnie Mae pass-through MBS.40

As a result of the GSE and Ginnie Mae standardized underwriting guidelines for 

single-family mortgages and the trading and settling parameters of the Good Delivery 

Guidelines, GSE MBS that may be delivered to satisfy a TBA trade will have similar 

characteristics. The mortgage loans underlying GSE and Ginnie Mae pass-through MBS 

are pooled together according to similar characteristics that are based on guidelines 

established by the GSEs and Ginnie Mae and enable the pools to satisfy the Good 

Delivery Guidelines.41 Under the Good Delivery Guidelines, only GSE and Ginnie Mae 

pass-through MBS that are within a particular product type and coupon, have certain 

basic attributes and fall within certain parameters can be delivered to satisfy a TBA trade. 

The TBA market functions on the premise that even though each pool that will be created 

is unique, all pools eligible for delivery on a given TBA trade are equivalent in their 

characteristics and expected performance. Therefore, any distinct characteristics of the 

underlying mortgage loans comprising a pool delivered in a trade are considered to blend 

together so that the MBS they back can be considered a generic security. As a result, 

TBA market participants consider MBS of Fannie Mae, Freddie Mac and Ginnie Mae 

that meet the Good Delivery Guidelines to be interchangeable or fungible with other such 

MBS issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, respectively. 

TBA trading vastly improves the liquidity of TBA-eligible pass-through MBS. 

Market participants have noted that the fungible nature of TBA securities promotes broad 

liquidity, which adds to efficiencies in pricing, execution, delivery and settlement. In 

addition, the TBA market allows lenders to finance mortgages, thereby locking in interest 

 

send out bond inquiries to dealers and offers mutual disclosure to both parties in a transaction. See Tommy 

Fernandez, Street Warming to MBS Web Marketplaces, AM. BANKER, Aug. 13, 2001, at 5. 40 See Biby, Modukuri & Hargrave, supra note 37; Deutsche Bank Report, supra note 8, at 18. THE BOND 

MARKET ASSOCIATION, TBAS: TO-BE-ANNOUNCED MORTGAGE SECURITIES TRANSACTIONS (1999). 41 Among the parameters in the Good Delivery Guidelines is a restriction on the percentage of non 

standard mortgage loans in an underlying pool that have diverging characteristics such as relocation loans, 

co-op loans and buy down loans (where a payment is made to reduce the interest rate.) 
19

rates, prior to the actual closing of a mortgage.42 Commentators have noted that 

“[w]ithout the TBA mechanism, mortgage pools could not be sold until they had been 

formed, and originators would have to hedge their pipelines using Treasury futures or 

Treasury or MBS options. Using TBA forward sales to hedge pipelines is more efficient 

and has probably resulted in lower mortgage rates for borrowers.”43

The pricing of TBA-eligible MBS is based on the assumption that the GSE or 

Ginnie Mae MBS delivered in the TBA trade will be a generic MBS – one that, based on 

the information available, is considered to be part of a fungible universe of TBA-eligible 

MBS. In a TBA transaction, the security traded is the one that the seller can buy or 

obtain at the lowest cost for delivery at settlement (and thus has a higher profit potential). 

In other words, TBA prices are based on the GSE or Ginnie Mae pass-through MBS that 

are the “cheapest to deliver.” Thus, the price of the cheapest to deliver security or the 

generic security in a TBA trade is the base price for TBA trades. Because the generic 

security trade price is the base price for TBA trades, this price is also the floor off which 

other MBS trades are priced. Any extra amount paid for a perceived benefit is measured 

relative to the base price. Market participants note that the tremendous market liquidity 

has created pricing efficiency and reduced the bid/ask spread to 1/16 of a point or even 

1/32 of a point. Bloomberg LP and other third party vendors publish average daily price 

quotations for TBA trades, which include only generic securities. There is also a 

competitive dealer and interdealer broker network from which daily pricing of trades in 

generic securities is available. 

As described above, the Good Delivery Guidelines establish standard notification 

and settlement dates for GSE and Ginnie Mae MBS. The trading guidelines require 

delivery of confirmations within one business day of the TBA forward trade. The 

confirmation must contain information regarding the security and the transaction, 

including product type, coupon rate and settlement month. The confirmation may contain 

other stipulated conditions that were negotiated as part of the trade. The Good Delivery 

 

42 “Other market participants that benefit from TBA trading are the mortgage bankers, commercial banks 

and thrifts that originate residential mortgages and sell them into the secondary mortgage market in 

securitized form. Most mortgage application processes allow a borrower to lock in a mortgage rate at some 

point prior to closing. After this rate lock, the mortgage originator is exposed to interest rate risk: the risk 

that the value of the mortgage may change as market rates change before the mortgage is sold. Actual 

MBS pools can be formed only after mortgages close; while they are in the pipeline, pool characteristics 

may shift if applicants withdraw their applications or postpone closing, fail to meet underwriting standards, 

or change loan amounts. Originators frequently hedge their pipelines of rate-locked mortgages by selling 

them into the forward market as mortgage securities for TBA delivery months (or more) in the future. TBA 

trading allows originators to sell prospective mortgage securities before they know the specific collateral 

characteristics of the pools.” Biby, Modukuri & Hargrave, supra note 37, at 106. 43 Id. Although attempts have been made to establish a mortgage futures contract, the most recent product 

by the Chicago Board of Trade introduced in 2001 was delisted in January 2002 due to lack of market 

interest. Market participants told the Task Force that they found mortgage futures not to be acceptable for a 

few reasons. First, the futures contracts did not afford participants the same flexibility or economic 

certainty they currently have in the TBA market. Second, the dealer community did not support the 

product. 
20

Guidelines also address delivery and settlement.44 Under the notification process of the 

guidelines, to satisfy the seller’s delivery obligation regarding the TBA trade, a seller 

must notify a purchaser 48 hours before settlement of the specific pools that will be 

delivered and the manner in which the pools will be assigned or allocated. Allocation is 

the process by which the seller determines which GSE or Ginnie Mae MBS will be 

delivered to the buyer to satisfy good delivery and requires that GSE or Ginnie Mae MBS 

assigned pools must be within certain parameters. The parameters are necessary to 

maintain the fungible character of the MBS delivered to satisfy a TBA trade. These 

parameters include the permissible variance in the face value of MBS being delivered and 

the number of MBS pools per million dollars traded.45 GSE and Ginnie Mae MBS are 

issued and transferred in book-entry form. 

The Good Delivery Guidelines prohibit delivery of securities until 2 business days 

after the seller provides pool information. As discussed below, the dollar roll market 

enables sellers to acquire pools to deliver to avoid settlement fails or to follow buy-in 

requirements. 

3. Types of Trades of TBA-Eligible MBS

TBA-eligible MBS may be traded three ways: generic, stipulated and specified 

trades. Generic TBA trades are trades that merely fit the Good Delivery Guidelines. The 

majority of GSE and Ginnie Mae pass-through MBS are traded on a generic basis 

through the TBA market process. Stipulated TBA trades are TBA-eligible securities 

meeting Good Delivery Guidelines that have characteristics that have been requested by 

the investor. In general, the stipulations are based on publicly available information 

about the pools or alterations of the Good Delivery Guidelines. The most common 

stipulated terms are number of pools that can be delivered, the principal dollar amount 

variance, maturity year, weighted average loan age of the mortgage loans in the pool, and 

geographic location of the underlying properties. Recently, investors have increasingly 

stipulated Alternative A characteristics. Investors also commonly stipulate to late 

delivery to facilitate a seller’s ability to obtain pools to satisfy an investor’s trade. 

 

44 “Bond Market Association scheduling of monthly settlements is designed to distribute settlement 

activity as evenly as possible over a series of days.... The monthly schedule was established for two main 

reasons. Dealers must await pool factors released near the beginning of the month before security trades 

can be settled. The factor is used to determine the current face value of securities. In addition, dealers can 

more easily create tradable blocks if all pools for a month of trading are specified on the same day; the 

larger the inventory of pools, the easier it is to meet the requirement of each buyer. Thus, the monthly 

settlement schedule helps ensure liquidity in the [GSE] MBS market.” Id. at 107. 45 Variance is the permitted deviation in the quantity of GSE MBS that can be delivered to satisfy an 

outstanding TBA obligation. The standard variance is currently .01% of the face value agreed to at the 

trade date. At settlement, therefore, a seller may deliver from 99.99% to 100.01% of the face amount of 

securities. The guidelines also mandate that TBA trades include a maximum of three pools per million for 

MBS with coupons below 11% and five pools per million for MBS with coupons of 11% or more. 

 The pools per million and variance rule are important both for combining irregular pools or securities 

and for ensuring that buyers are not forced to accept delivery of a large number of splintered pools. The 

notification rule gives the parties to the trade time to prepare for settlement and ensure that the trade goes 

smoothly. See Id. at 109-10. 
21

Investors entering into a stipulated trade will pay a higher price than the price for a 

generic pool in the TBA market. This is known as “paying up.” As with generic TBA 

trades, there is no specific security identified at the time the parties enter into the trade. 46

Finally, TBA-eligible securities may be traded on a specified pool basis. 

Investors that wish to purchase a particular mortgage pool will engage in a specified trade 

– they will identify the actual pool they wish to purchase by pool and CUSIP number. 

Unlike generic and stipulated trades, specified pool trades occur outside the TBA market. 

There are a number of reasons an investor may engage in a specified trade. For instance, 

an investor may want to purchase particular pools that have been in existence for a period 

of time, known as seasoned MBS, because of their better known prepayment 

characteristics.47 Investors can examine the prepayment history of seasoned pools before 

actually purchasing them. Although seasoned pools may trade in the TBA market, and 

can be used to settle any TBA trade, they often trade on a specified basis outside the TBA 

market because of the increased differentiation in prepayment histories. 

Among newly created MBS, specified pools generally command the highest price 

due to the additional available information regarding the content of the pool indicating 

the pool is worth more than a generic pool. Market participants have indicated that 

investors generally obtain information on these pools from dealers or originators. These 

market participants have indicated, however, that certain historical information they may 

receive about previously specified pools cannot be independently verified. 

4. Dollar Rolls

In addition to the flexibility the TBA market gives to buyers to determine the 

level of specificity the buyer desires in terms of pool characteristics, the TBA market has 

two distinct trading uses. Investors, dealers, originators and other participants use the 

TBA market not only to acquire pools for investment or to form other investment 

vehicles, but TBA market participants trade TBA pools in “dollar rolls” as financing 

vehicles.48

 

46 According to The Bond Market Association stipulations could be on, among other things, date of 

issuance, geographic, lot, lot variance, maturity, pieces, pools per lot, pools per million, pools per trade, 

trade variance, weighted average coupon, loan age or maturity, whole pool, and year of issuance. See The 

Bond Market Association, Fixed Income Protocols Initiative, TBA Mortgage-Backed Securities, Draft 

Business Practices Documentation in Plain English (working draft 2002) 6 (visited Dec. 12, 2002) 

<http://www.bondmarkets.com/ecommerce/tba-mbs_business_practices.pdf >; Jordan & Jordan, The Bond 

Market Association STP/T 1 Mortgage-Backed Securities & Related Products, Codes of Practice (working 

draft version 2.0 Dec. 19, 2001) 5 (visited Dec. 12, 2002)<http://www.bondmarkets.com/ecommerce/ 

cop_mortgage_draft_2-0.pdf> ); Deutsche Bank Report, supra note 8, at 18. According to some market 

participants, mortgage originators are increasing stipulated pool formation, which increases variability in 

pool prepayment speeds. 

47 REMIC issuers that may be using GSE or Ginnie Mae MBS for the assets of their trust may need pools 

that have particular collateral characteristics and thus may specify pools for this purpose. 

48 See Deutsche Bank Report, supra note 8, at 32. See generally Biby, Modukuri & Hargrave supra note 

37, at 139-148. 
22

Dollar rolls, which are a form of collateralized short-term financing where the 

collateral consists of mortgage securities, perform a function analogous to that provided 

by the repo (repurchase agreement) market. The vast majority of financing in the MBS 

market occurs through the dollar roll market, which takes advantage of the flexibility of 

the TBA market. Unlike a reverse repurchase agreement, which generally requires 

redelivery of exactly the same securities that are delivered during the first leg of the 

transaction, a dollar roll is a simultaneous purchase and sale of substantially similar 

(TBA) securities for different settlement dates. The dealer, who is said to “roll in” the 

securities received, is not required to deliver the identical securities, only securities that 

meet the Good Delivery Guidelines. Thus, the investor may assume some risk because 

the characteristics of the MBS delivered to the investor may be less favorable than the 

MBS the investor delivered to the dealer. Because the dealer is not obligated to return 

the identical MBS collateral that the investor has delivered, both parties usually transact 

the dollar roll with generic GSE or Ginnie Mae MBS pools that they believe to be of the 

same or less value than the average TBA-eligible security. 

Dollar roll deliveries are made pursuant to TBA Good Delivery Guidelines. Most 

dollar roll purchase and sale dates conform to the same dates as TBA MBS delivery.49

The dollar roll market has been noted to have more favorable borrowing rates than the 

repo market for MBS, which benefits market participants.50 The dollar roll market also 

allows dealers and other sellers to acquire pools for delivery to satisfy existing TBA 

trades, thus avoiding failed trades and providing a tool to manage supply/demand 

imbalances in the market.51

F. Creation and Sales of Private-label MBS

1. Creation of Private-label MBS

A private-label issuer generally creates MBS using whole loans that it either 

originates or acquires in the secondary whole loan market or uses MBS, including GSE 

and Ginnie Mae MBS, it acquires in the market. The MBS issuer will assemble pools of 

mortgage loans that it will deposit into a trust in exchange for MBS. Most private-label 

MBS are designed to meet specific investor needs; thus, the private label issuer will 

generally obtain dealer and investor input on the desired characteristics of the various 

 

49 “Consolidating all of an [GSE] agency/coupons trades into a single settlement day each month greatly 

increases the liquidity of the mortgage market.” Deutsche Bank Report, supra note 8, at 33. 50 “A dollar roll transaction transfers prepayment risk to the dealer, who must attach a prepayment 

assumption to the dollar roll and weigh the risk of forecasting error. Exactly the same par amount of 

securities is returned in a dollar roll (within TBA variance guidelines). In a repo, the security owner bears 

the prepayment risk.” Id. at 32-33. 51 “Dollar rolls offer dealers a convenient way to obtain promised mortgage securities, avoiding much of 

the cost of failing to make timely delivery. In theory, the dealer (the short coverer) will be willing to pay 

up to the cost of failure to deliver for the short-term opportunity to borrow or purchase securities required 

to meet a delivery commitment. For this reason most dollar rolls are transacted close to the monthly 

settlement date for mortgage-backed securities. Dollar rolls also allow dealers to even out the supply and 

demand for mortgage securities in the current settlement month and ‘back’ months.” Biby, Modukuri & 

Hargrave, supra note 37, at 140. 
23

MBS classes to be issued in any particular deal prior to depositing the pool of whole 

mortgage loans or MBS into the trust. Once the private-label MBS structure is 

established, the mortgage loans will be deposited into a trust and the MBS sold to 

investors for cash. The private-label issuer or its affiliates may also retain certain classes 

of the MBS offered in any deal. Private-label MBS, generally REMICs (backed by both 

GSE and non-GSE collateral), are composed of specified pools. The diversity of the 

underlying collateral and credit risk issues heighten investor demand for detailed 

information to assess prepayment and credit risk. 

2. Sales of Private-label MBS

Private-label MBS are not sold in the TBA market. Private-label MBS typically 

are offered initially through underwriters and generally are not traded on a registered 

exchange or other organized market. As a result of the fact that private-label MBS have a 

wide variety of multi-class structures, pool characteristics and issuer standards, they are 

not fungible and more information about the private-label MBS is provided to facilitate 

trading. While the private-label MBS market is less liquid than the TBA market, market 

participants indicate that there is a resale market for many private-label MBS. Because 

there is no established trading market for resales of private-label MBS, participants in this 

market must rely on dealer to customer interaction to effect transactions in these 

securities. The trades are carried out in the over-the-counter market by telephone, fax 

and e-mail with dealers. 

G. Statutes Governing the Offer and Sale of MBS

The GSEs and Ginnie Mae were created by federal legislation, and a number of 

provisions of federal law exempt their securities from most provisions of the federal 

securities laws. These exemptions extend to the offer and sale of MBS issued or 

guaranteed by the GSEs or Ginnie Mae. As discussed below, securities of private-label 

issuers, including the offer and sale of their MBS, are subject to regulation under these 

laws. 

Ginnie Mae is a wholly-owned corporation of the United States Government 

under HUD. As such, the securities it guarantees are exempt securities under Section 

3(a)(2) of the Securities Act52 and Section 3(a)(12) of the Exchange Act.53 The Federal 

National Mortgage Association Charter Act provides that securities issued or guaranteed 

by Fannie Mae will be considered exempt securities to the same extent as U.S. 

Government securities and as such are also exempt in the same manner as securities that 

Ginnie Mae guarantees.54 The Federal Home Loan Mortgage Corporation Act contains a 

similar provision for Freddie Mac.55 Therefore, GSE and Ginnie Mae MBS may be 

offered and sold without registration under the Securities Act and the securities are freely 

 

52 15 U.S.C. § 77c(a)(2). 

53 15 U.S.C. § 78c(a)(12). 

54 See 12 U.S.C. § 1723c. 55 See 12 U.S.C. § 1455g.
24

tradable securities. Furthermore, the securities are also considered government securities 

under the Exchange Act and may be traded by government securities brokers.56 Finally, 

GSE and Ginnie Mae MBS are also exempt from the Trust Indenture Act of 1939 and the 

Investment Company Act of 1940.57

These exemptions, however, do not mean that the GSEs and issuers of Ginnie 

Mae MBS are exempt from the antifraud provisions of the federal securities laws. Section 

17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 

promulgated thereunder, apply to all issuers of securities, whether or not the offer and 

sale is registered under the Securities Act.58 The antifraud provisions of the federal 

securities laws prohibit fraudulent or deceptive practices in the offer and sale of MBS. 

Specifically, the provisions prohibit any person from making a false or misleading 

statement of material fact. In making disclosures, issuers also may not omit to state a 

material fact that is necessary in order to make the statements made not misleading. To 

be considered material, there must be a substantial likelihood that the disclosure of the 

omitted fact “would have been viewed by the reasonable investor as having significantly 

altered the ‘total mix’ of information made available.”59 GSE disclosures are also subject 

to OFHEO safety and soundness supervision and regulation. 

Unlike GSE and Ginnie Mae MBS, offerings of private-label MBS are subject to 

the registration requirements of the federal securities laws. As such the offer and sale of 

these securities must be done pursuant to a registration statement filed with the 

Commission or pursuant to an exemption. The registration statement must meet the 

Commission’s disclosure requirements. If an exemption from the registration 

requirements is available, the private-label securities may be sold without filing a 

registration statement with the Commission.60 Almost all private-label MBS that are not 

sold pursuant to a registration statement are sold in the 144A market. Rule 144A, a nonexclusive safe harbor from the registration requirements of the Securities Act, permits 

resales to institutional investors that meet the criteria for “qualified institutional buyer” 

 

56 See 15 U.S.C. § 78c(a)(42) - (43). All brokers and dealers in government securities, including banks, 

must register with or give notice to their appropriate regulatory agency and are subject to certain rules of 

that agency or their self-regulatory organization, as well as the rules of the Department of the Treasury. 

See 15 U.S.C. § 78o. These rules include certain sales practice provisions, including suitability obligations 

when making recommendations to certain customers. 

57 See 15 U.S.C. § 77aaa – bbbb; 15 U.S.C. § 80a-1 to -64. 58 See 15 U.S.C. § 77q(a); 15 U.S.C.§ 78j(b) and 17 C.F.R. § 240.10b-5. Private-label issuers selling 

registered MBS are also subject to the liability provisions of Sections 11 and 12 of the Securities Act and 

Section 18 of the Exchange Act with respect to reports they file with the Commission. See 15 U.S.C. § 

77k; 15 U.S.C. § 77l and 15 U.S.C. § 78r. 

59 TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 60 If the private-label securities are sold pursuant to an exemption from registration, the private-label issuer 

generally would look to a transactional exemption, such as one of the private placement exemptions under 

Section 4(2), 15 U.S.C. § 77d(2), or Regulation D, 17 C.F.R. § 230.501-.508, promulgated under the 

Securities Act. Section 4(2) exempts “transactions by an issuer not involving any public offering.” 

Generally the private-label issuer would issue securities under Section 4(2) of the Securities Act in a 

transaction structured to allow resales pursuant to Rule 144A under the Securities Act. 
25

(“QIB”) of certain privately placed securities.61 Rule 144A also contains an information 

disclosure requirement if the issuer of the securities is not a reporting entity under the 

Exchange Act.62 Market participants have indicated that the vast majority of private-label 

MBS, over 98% in 2001, are sold in registered transactions with the remainder being sold 

in Rule 144A transactions. 63

 

61 See 17 C.F.R. § 230.144A. A QIB includes institutional investors that own and invest on a discretionary 

basis at least $100 million ($10 million for registered securities dealers acting for their own accounts or the 

accounts of other QIBs) in securities of issuers unaffiliated with the QIBs (with certain limited exclusions). 

Rule 144A identifies the types of entities that could qualify as QIBs. See Id. 62 For MBS, the servicer or the trustee is considered the issuer of the MBS for purposes of the information 

requirements of Rule 144A. The Commission stated in the Rule 144A adopting release that, for MBS 

resales, it would consider information concerning the structure of the securities, distributions on the 

securities, the underlying assets (type, performance, and servicing information), and credit enhancement 

mechanism, if any, as satisfying the Rule 144A information requirements. See Resale of Restricted 

Securities, Securities Act Release No. 33-6862 (Apr. 30, 1990). In a 1990 no-action letter, the Commission 

staff agreed that the issuers could satisfy the information disclosure requirement by contractually requiring 

the trustee to deliver the required information. Kutak Rock & Campbell, SEC No-Action Letter (Nov. 29, 

1990). 

63 See Thompson Financial, Mortgage Backed Securities Industry Totals 1996-2001 (Excluding CMBS and 

Federal Agency Issuances)(Dec. 6, 2002). Various market participants have suggested that disclosure 

standards in Rule 144A offerings are similar to those in Commission-registered offerings. Given the small 

percentage of private-label offerings under Rule 144A and the difficulties in accessing documentation of 

these private transactions, the Task Force did not evaluate disclosure practices in Rule 144A offerings. 
26

III. CURRENT DISCLOSURE PRACTICES 

A. General

The content and timing of disclosure vary with the type of issuer and type of 

security offered. Both private-label and GSE and Ginnie Mae MBS issuers provide 

disclosure to potential MBS investors in a series of documents and through a variety of 

means. The MBS structure used, whether pass-through or REMIC, will directly affect 

the form and content of disclosure, because disclosure will address the terms and risks of 

the securities being sold. While almost all pass-through MBS are issued by the GSEs or 

Ginnie Mae issuers, private-label issuers sell primarily REMIC securities. In MBS 

offerings, disclosure is particularly focused on helping investors evaluate the prepayment 

and credit risks. 

 In addition, the different characteristics of the underlying mortgage loans included 

in GSE and Ginnie Mae MBS and private-label MBS affect the format and content of the 

disclosures in the respective MBS deals. As discussed above, there have been significant 

differences, historically, between the mortgage loans underlying GSE and Ginnie Mae 

MBS and those underlying private-label MBS. Some of these differences between the 

mortgage loans in GSE and Ginnie Mae or private-label MBS pools may be changing as 

the GSEs expand their programs to include mortgage loans that may have more or less 

advantageous payment characteristics than the majority of mortgage loans included in 

GSE MBS. Because these changes may affect the existing homogeneity of the GSE 

MBS pools, the changes may also impact the type of information that investors require to 

assess risk and that the GSEs provide about their MBS pools in the future. 

Private-label issuers and the GSEs and Ginnie Mae provide MBS disclosure to 

investors using different mechanisms. The differences in disclosure delivery arise for 

two primary reasons. First, while GSE and Ginnie Mae MBS are exempt from the 

registration and reporting requirements of the federal securities laws, private-label issuers 

must either file a registration statement meeting the Commission’s disclosure 

requirements or rely on an exemption from registration. Second, GSE and Ginnie Mae 

pass-through MBS are often sold through a different market, the TBA market, than 

private-label MBS and GSE and Ginnie Mae REMICs backed by TBA-eligible passthrough MBS. As noted above, the mortgage loans may not even have been made at the 

time of sale in the TBA market, while the loans have been pooled and described by the 

time of issuance in the private-label market. Disclosure procedures for providing 

ongoing information are also different for the GSEs, Ginnie Mae and private-label 

issuers. 

B. Offering Documents

1. Private-label Offering Materials

 A private-label issuer that registers the offer and sale of its MBS under the 

Securities Act must comply with the content and procedural requirements of the 
27

Securities Act covering such offering. In registered offerings under the Securities Act, 

private-label issuers will disclose material information to investors through the use of two 

primary documents: the core prospectus and the prospectus supplement. When privatelabel issuers file a registration statement to register an issuance of MBS, they typically 

use what is called “shelf registration.”64 Through this process, issuers first file a 

disclosure document that outlines the parameters of the various types of MBS offerings 

they may conduct in the future. This document is known as the “core” or “base” 

prospectus. The registration statement will also contain a form of prospectus supplement, 

which outlines the format of deal-specific information they will disclose when they later 

conduct an offering. 

In the private-label market, issuers may structure their MBS offerings to meet the 

particular investment needs of the investors to whom they wish to sell. In this regard, 

private-label issuers will often provide potential investors with computational materials 

and structural and collateral term sheets prior to finalizing the deal structure and printing 

the final prospectus supplement.65 These materials are intended to help investors 

understand the proposed transaction and analyze prepayment assumptions and other 

issues affecting yield. Structural term sheets set out the proposed structure of the 

securities being offered, such as the parameters of the various types of classes in a 

REMIC. Private-label issuers using structural term sheets may be required to file them 

with the Commission and incorporate them by reference into the registration statement 

for the registered offering.66 Collateral term sheets provide information regarding the 

proposed underlying assets. Collateral term sheets, like structural term sheets, may also 

be required to be filed with the Commission and thereby incorporated by reference into 

the registration statement. A prospectus supplement describing the terms of the securities 

the issuer intends to offer, particular risks, information regarding the assets and other 

deal-specific information may also be prepared and used in the offering process. The 

final prospectus supplement must be filed with the Commission within two business days 

following its first use.67 As noted earlier, if the private-label MBS are not sold pursuant to 

a registration statement filed with the Commission, the private-label issuer must rely on 

an exemption from registration to sell the MBS.68

 

64 At the time of enactment of SMMEA, the Commission amended Rule 415, which is known as the shelf 

rule, to allow SMMEA eligible mortgage related securities to use the shelf offering process. See

Simplification of Registration Procedures for Primary Securities Offerings, Release No. 33-6964 (Oct. 22, 

1992). 

65 See Michael S. Gambro & Scott Leichtner, Selected Legal Issues Affecting Securitization, 1 N.C.

BANKING INST. 131, 146 (Mar. 1997). 66 See Greenwood Trust Company, Discover Card Master Trust I, SEC No-Action Letter (Apr. 5, 1996); 

Public Securities Ass’n, SEC No-Action Letter (Mar. 9, 1995); Public Securities Ass’n, SEC No-Action 

Letter (Feb. 17, 1995); Public Securities Ass’n, SEC No-Action Letter, (May 27, 1994); Kidder Peabody, 

SEC No-Action Letter, (May 20, 1994). Most private-label MBS offerings are registered on Form S-3 for 

the “shelf”, which incorporates by reference into the registration statement future filings by the same issuer. 

When issuers are required to file structural and collateral term sheets, they file them on Form 8-K, which is 

then considered to be part of the shelf registration statement. 

67 See Instruction 1 to Securities Act Rule 424, 17 C.F.R. § 230.424. 68 Private-label private placements offering materials generally do not differ widely from those used in 

registered offerings. 
28

2. GSE and Ginnie Mae Offering Materials

The GSEs and Ginnie Mae are not subject to the registration requirements of the 

Securities Act in connection with their MBS offerings.69 The GSEs and Ginnie Mae do 

not file any MBS offering materials with the Commission. However, the GSEs prepare 

offering documents similar in form to the core prospectuses filed by private-label issuers 

in registered offerings and make deal-specific information available through either final 

prospectus supplements or website disclosures. Fannie Mae and Freddie Mac post their 

offering documents on their websites. Investors also receive disclosures as part of the 

settlement process for TBA trades.70

Fannie Mae and Freddie Mac provide disclosures to investors through various 

documents including the base prospectuses and deal specific supplements. Fannie Mae 

and Freddie Mac also make available information statements that describe their business 

and operations, as well as include their full audited financial statements. An information 

statement provides information investors need in order to evaluate the GSEs’ guarantees 

of the MBS. Ginnie Mae, unlike Fannie Mae and Freddie Mac, does not utilize either a 

core prospectus or prospectus supplement to disclose information regarding its 

guaranteed pass-through MBS issuances. Instead, Ginnie Mae requires each issuer to use 

a single required form of disclosure document for the initial MBS sale. 

C. Post-Offering Disclosures 

1. Private-label MBS

Private-label issuers that have registered the offer and sale of MBS under the 

Securities Act generally will have a limited mandatory obligation to continue providing 

information on the MBS.71 The Exchange Act requires that issuers that have offered and 

sold securities publicly pursuant to a registration statement must file periodic reports. 

However, registrants that become subject to reporting requirements pursuant to Section 

15(d) of the Exchange Act may discontinue reporting after they file their first annual 

report on Form 10-K if they have less than 300 record holders.72 Most MBS issuances 

 

69 See supra text accompanying notes 52-57. 70 Investors receive confirmations of TBA trades. The confirmations will comply with the Good Delivery 

Guidelines and Rule 10b-10 under the Exchange Act (17 C.F.R. § 240.10b-10) and will provide 

information regarding the terms of the TBA trade. 

71 See 15 U.S.C.§ 78o(d). This assumes that the MBS, as is typically the case, is not trading on an 

exchange or quoted on an automated quotation system. 

72 See 17 C.F.R. § 240.15d-6; 17 C.F.R. § 240.12h-3. MBS issuers, like most fixed-income securities 

issuers, do not usually register their securities under the Exchange Act and typically have a small number 

of record holders. Therefore, they are usually able to suspend their reporting obligations on the first day of 

the fiscal year after their registered offering takes place. In the context of shelf registration statements, 

where a trust is formed for the issuance of each separate series of securities, a new reporting obligation is 

incurred by each new trust that is formed and that offers securities under the shelf registration statement. 

Each trust may stop reporting if it meets the requirements of Section 15(d) of the Exchange Act, 

notwithstanding the fact that separate trusts of the same sponsor may issue MBS during the fiscal year. 
29

have less than 300 record holders. Therefore, most private-label issuers are not required 

to continue filing reports with the Commission after they file their first annual report. 

Although the securities were offered publicly, the small number of investors indicates 

that the issuer should no longer be considered a public entity. Because of the passive 

nature of MBS issuers, the staff of the Commission has allowed a modified reporting 

scheme under the Exchange Act for MBS issuers.73

2. GSE and Ginnie Mae MBS

Ginnie Mae and the GSEs provide ongoing disclosure regarding the pools 

underlying the securities they issue or guarantee.74 These disclosures generally are 

provided on a monthly basis for the life of the security through a combination of website 

disclosures, which vary among the three entities, and disclosures provided by third party 

information vendors, some of whom purchase information from the GSEs and Ginnie 

Mae and provide that information to the public for a fee.75

D. Particular Issues Addressed by Disclosure

As noted above, the characteristics of the underlying mortgage loans and the 

marketplace’s evaluation of their expected payment speeds will affect the structure, 

 

73 Form 8-Ks are filed based on the frequency of payments on the underlying assets in the trust (but not 

less than quarterly). These filings include a copy of the servicing or distribution report required by the 

pooling and servicing agreement or other governing documents regarding the trust. These reports include 

unaudited information about the performance of the assets, payments on the MBS, and any other material 

developments that affect the trust. 

 Private-label issuers also file a modified Form 10-K. This form may aggregate the information in the 

Form 8-Ks for the fiscal year, respond to other applicable item requirements of the form, and include 

annual statements from the servicer (or other relevant entity), so long as the private-label issuer continues 

to be a reporting entity. The servicing information must be reviewed (but not audited) by an independent 

auditor. Any required exhibits must also be filed. Financial statements are not required. See, e.g., Release 

No. 34-16520 (Jan. 23, 1980) (order granting application pursuant to Section 12(h) of Home Savings and 

Loan Association); Release No. 34-14446 (Feb. 6, 1978) (order granting application pursuant to Section 

12(h) of Bank of America National Trust and Savings Association); Bay View Securitization Corp., SEC 

No-Action Letter (Jan. 15, 1998); Key Bank USA, Nat’l Ass’n, SEC No-Action Letter (May 9, 1997); 

CWMBS, Inc., SEC No-Action Letter (Feb. 3, 1994).

 A private-label issuer sometimes continues to provide information to the holders of the MBS after its 

reporting obligation with the Commission is suspended or even if it was never subject to Exchange Act 

reporting requirements. This may be because of the terms of the pooling and servicing agreement, the 

indenture pursuant to which the MBS are issued, the terms of any purchase contract in a Rule 144A or 

private placement transaction, or the demands of the marketplace. In addition to providing information to 

the trustee under the indenture, private-label issuers may put MBS performance information on their or the 

trustees websites or use third party information vendors to disseminate the information. 

74 See infra note 79. 75 For example, with respect to individual pools, Bloomberg LP provides information such as the current 

weighted average coupon of the pool, the issue and maturity date of the MBS, the weighted average loan 

age and weighted average remaining maturity as of the most recent factor date, and the original and current 

unpaid principal balance on the underlying loans. The GSEs have stated that the information that they 

provide to third party vendors is also either available on their websites or can be calculated from such 

information. 
30

marketability and risk characteristics of the particular MBS. The yield, or return, on 

MBS is primarily determined by the timing of payments on the underlying mortgage 

loans. The underlying mortgage loans in a GSE or Ginnie Mae MBS will often have 

different payment (including default and prepayment) and other characteristics from 

those in a private-label MBS. This is due in large part to the eligibility requirements for 

the underlying mortgage loans and the underwriting standards and guarantee 

requirements that Ginnie Mae and the GSEs have established for their MBS programs. 

The effect of these requirements is that the mortgage loans underlying GSE and Ginnie 

Mae MBS may be less diverse than those underlying private-label MBS. GSE and 

Ginnie Mae MBS will have more common or homogeneous features and will benefit 

from the GSE and Ginnie Mae guarantees. 

1. Prepayment Risk

As previously discussed, a major risk in an investment in MBS is prepayment 

risk. Due to the importance of prepayment risk to an investor’s decision to invest in 

MBS, the key disclosures in MBS issuances relate to the various factors that might affect 

prepayment. 

Market participants have developed prepayment models to evaluate prepayment 

risks. Prepayment models make certain assumptions regarding probable payments on the 

underlying mortgage loans in order to estimate or predict cash flows.76 The goal of a 

prepayment model is to tie together projected mortgage rates and projected prepayment.77

The more diverse the underlying collateral is in terms of coupons, maturity and loan age, 

among other characteristics, the greater the need for more detailed information to be able 

to model for different prepayment scenarios.78

2. Credit Risk

As discussed above, credit risk, the risk that the borrowers on the underlying 

loans may not make timely payments or may default on their loans, is thought by 

investors to be more significant in private-label MBS than in GSE or Ginnie Mae MBS. 

Consequently, GSE and Ginnie Mae MBS and the private-label MBS may pose differing 

degrees of risk for investors. The GSEs and Ginnie Mae guarantee the timely payment of 

principal and interest on the MBS. The Ginnie Mae guarantee is backed by the full faith 

and credit of the United States. Fannie Mae and Freddie Mac guarantees do not have 

United States backing. Investors should look to the audited financial statements and 

 

76 See Lowell, supra note 10, at 41. 77 See Bykhovsky, supra note 25, at 366. 78 The GSEs may change their underwriting criteria for a variety of reasons. For GSE pools of a given 

size, expansion of underwriting criteria by the GSEs could lead to decreasing pool homogeneity and 

increasing unpredictability of pool performance. Changed GSE underwriting criteria would also affect the 

composition of pools underlying private label MBS and would therefore affect the prepayment behavior of 

private label securities. See Dale Westhoff & V.S. Srinivasan, The Next Generation of Prepayment Models 

to Value Nonagency MBS in THE HANDBOOK OF MORTGAGE-BACKED SECURITIES, supra note 10, at 397, 

400. 
31

other disclosures of Fannie Mae and Freddie Mac, as well as safety and soundness 

information provided by OFHEO, to assess the credit risk. 

E. Types of Disclosure 

Characteristics of the loans backing MBS, of the properties that collateralize the 

loans, and of the borrowers can have a significant effect on the prepayment and default 

behavior of the loans and, therefore, on the expected payments to security holders. 

Market participants have focused on various pieces of information that may help them 

understand the risk of prepayment or payment failure. Factors that have been most 

widely noted, including those that are currently disclosed, and some that are not, are 

discussed below. The GSEs and Ginnie Mae disclosures discussed are only with regard 

to their pass-through MBS.79 With respect to Freddie Mac, the discussion below 

addresses the content and timing of disclosure for its swap program.80

1. Loan Terms

The most important loan terms are the interest rates (coupons) paid by the 

borrowers, the loan maturity dates, the ages of the loans (including origination years), and 

the sizes of the loans. 

a. Coupon or Interest Rates on Underlying Loans

Coupon information is critical because a borrower’s financial incentive to prepay 

a loan depends on the relationship between the coupon and current market rates. The 

difference between the interest rate on a mortgage loan and the prevailing market interest 

rate is the most important factor in evaluating the likelihood that the mortgage loan will 

be prepaid.81 When interest rates in the market drop and the spread increases between the 

mortgage loan’s interest rate and the available market interest rates, the incentive to 

refinance an existing loan increases. In order to predict the prepayment of mortgage 

loans included within a pool underlying MBS, investors look to information that 

discloses the interest rates of mortgage loans within the MBS pool, and the interest rates 

that are most prevalent within the pool. One measure of the overall interest rates on 

 

79 While private-label issuers generally provide more information in their Commission filings than the 

GSEs and Ginnie Mae issuers provide in their offering materials, the information is provided, as to most 

categories of data, in incremental ranges such as quartiles and not with respect to each mortgage loan 

within the pool. With respect to the information described in this section and disclosed by the GSEs and 

Ginnie Mae prior to settlement, that information is generally updated by the GSEs monthly and Ginnie Mae 

quarterly. As noted in subsequent footnotes, Fannie Mae and Ginnie Mae initially disclose certain items of 

information after settlement and update the information monthly for Fannie Mae and generally quarterly for 

Ginnie Mae. 

 Most pools are composed of fixed-rate loans. For MBS backed by pools of adjustable-rate loans, there 

is disclosure describing how the future rates are determined. 

80 Freddie Mac’s swap program comprises approximately 85% of its fixed rate pass-through MBS 

issuances. For its cash program, Freddie Mac usually provides similar disclosure, but it is generally 

provided within two weeks following settlement of the TBA trade. 

81 See LORE & COWAN, supra note 7, at 3-3. 
32

mortgage loans underlying a MBS pool is the pool’s weighted average coupon, or WAC. 

The WAC is the average of the coupons on the loans included in the pool, weighted by 

each loan’s outstanding balance. 

At issuance, Freddie Mac and private-label issuers typically disclose the WAC for 

the pool and the distribution of the pool’s total unpaid principal balances in various 

increments across coupon ranges. For example, private label issuers might disclose how 

much principal of the pool is subject to an interest rate of greater than six percent and less 

than or equal to 6 1/8 percent.82 Fannie Mae and Ginnie Mae disclose each pool’s WAC 

prior to settlement.83

b. Loan Maturity Dates and Loan Age

Information on original loan maturities (most often 15 or 30 years), remaining 

maturities, and loan age make it possible for investors to estimate future loan 

amortization payments. Principal payments increase as loans age, and the payments are 

lower the longer the original maturities are. The difference between original maturity and 

remaining maturity may be greater than loan age if borrowers have partially prepaid loans 

because partial prepayments shorten remaining maturities. Given loan age and original 

maturity, a shorter remaining maturity implies faster amortization. The longest maturity 

date of a pool helps investors determine the latest possible date by which scheduled 

payments on the underlying mortgage loans and, in turn, the MBS should be made. 

The weighted average maturity of the pool provides investors with information 

about the maturity dates of the loans included in the pool. Calculated initially as of the 

date of pool formation, weighted average maturity is the average of the maturities of the 

loans included in the pools, weighted by each loan’s outstanding balance. Many MBS 

issuers provide updated maturity information, which is the weighted average remaining 

maturity of all loans remaining in the pool at the date of calculation. As loans are paid 

off or prepaid, the number of remaining monthly payments decreases. To the extent 

prepayments are made, the remaining maturity decreases at a faster rate than it would if 

borrowers paid only the required amount each month. Thus, investors can evaluate 

prepayment speeds and make determinations as to when they expect to receive payment 

on the MBS by examining changes in the pool’s weighted average remaining maturity or 

by comparing the pool’s average remaining term to maturity with its weighted average 

original loan term and weighted average loan age. Unless loan age and loan maturity are 

evaluated together, prepayments could make a pool look older than it actually is.84

 

82 Freddie Mac discloses information about coupon ranges in the pool by breaking the pool disclosure 

down into four segments, also known as quartile data. 

83 Fannie Mae discloses WAC quartile data following settlement. Fannie Mae has stated that it will begin 

disclosing this information prior to settlement in March 2003. Prior to settlement, Fannie Mae discloses the 

highest and lowest annual interest rates on the underlying mortgage loans. In the Ginnie Mae I program, 

the coupon rate for all loans is disclosed. In the Ginnie Mae II program, the range, but not the distribution, 

of loan coupons is disclosed. 

84 See WILLIAM W. BARTLETT, THE VALUATION OF MORTGAGE-BACKED SECURITIES 42 (1994). 
33

Information on loan age is also useful in predicting prepayment speeds because 

prepayments tend to increase during the first few years of newly issued pools and then 

level out. 85 As a result, most MBS issuers disclose a pool’s weighted average loan age or 

information regarding the prevalence of specific loan origination years within the pool, or 

both. 

Prior to settlement, Freddie Mac discloses each pool’s weighted average 

remaining term to maturity, weighted average loan age, weighted average original loan 

term, and latest loan maturity date, as well as the total number of loans, unpaid principal 

balance, and percent of the pool attributed to each loan origination year. Freddie Mac 

also discloses, again prior to settlement, quartile data for each pool’s weighted average 

maturity, weighted average loan age, and weighted average original loan term. Prior to 

settlement, Fannie Mae discloses each pool’s weighted average remaining term to 

maturity, latest loan maturity date, number of mortgage loans and unpaid principal 

balance.86 Ginnie Mae discloses each pool’s weighted average remaining term to 

maturity, weighted average loan age, and weighted average original loan term prior to 

settlement.87 Ginnie Mae also discloses the unpaid principal balance.

Private-label issuers typically provide information similar to that provided by 

Fannie Mae and Freddie Mac. In their offering documents, most private-label issuers 

disclose each pool’s weighted average remaining term to maturity and some disclose 

weighted average original loan term. They also sometimes disclose, by ranges of original 

loan term and either remaining terms to maturity or loan maturity year, the number of 

loans, aggregate principal balance, and percent of pool principal balance included in each 

range. Private label issuers also typically disclose either the pool’s weighted average 

loan age, with incremental disclosures comparable to those for remaining term to 

maturity, or loan origination year.

Finally, MBS issuers generally disclose changes in a pool's aggregate unpaid 

principal balance. Disclosure of these changes over time may provide useful information 

regarding the levels of default and prepayment in a particular pool. This is most relevant 

in a REMIC structure. For example, a larger-than-expected decline in unpaid principal 

balance may indicate that some of the underlying loans have either defaulted or prepaid at 

a higher-than-expected rate. MBS issuers generally disclose the aggregate unpaid 

principal balance of the MBS pool at issuance and update that information monthly. In 

addition, the GSEs and Ginnie Mae disclose each pool's “current factor” on a monthly 

basis after settlement. The current factor is a decimal that represents the fraction of the 

pool's original unpaid principal balance that remains unpaid. The current factor data for 

 

85 See LORE & COWAN, supra note 7, at 1-6 to 1-7 86 Fannie Mae discloses weighted average remaining term to maturity, weighted average loan age, and 

weighted average original loan term quartile data following settlement. Fannie Mae has stated it will begin 

disclosing this information prior to settlement in March 2003. Fannie Mae also discloses loan origination 

year information after settlement. It has stated it will disclose weighted average loan age and weighted 

average original loan term prior to settlement beginning in March 2003. 

87 Following settlement, Ginnie Mae discloses the number of loans in the pool. Ginnie Mae has stated it 

will disclose the number of loans in the pool prior to settlement beginning in March 2003. 
34

MBS create, over time, a pool history of loan prepayments that is useful in projecting 

future prepayments. 

c. Loan Size

It has been suggested that other than the refinancing incentive, the most important 

factor in explaining prepayment behavior is loan size.88 This is because if refinancing 

costs are fixed, borrowers with larger loan balances will have more incentive to refinance 

because the costs can be recouped more easily. Also, because loan commissions 

typically increase with loan size, servicers who solicit borrowers to refinance are more 

likely to target those with higher principal balances. 89 At issuance, private-label issuers 

generally provide the average original loan size, together with the number of mortgage 

loans within a range of balances, the aggregate principal balances of the mortgage loans 

within each range, and the percentage of the aggregate principal balance of the pool 

represented by loans in each range. Private-label loan size information is typically 

presented in increments of $50,000. Prior to settlement, Fannie Mae and Freddie Mac 

disclose the average original loan size and Freddie Mac discloses quartile data on average 

original loan size.90 Prior to settlement, Ginnie Mae discloses only the aggregate original 

loan balance of the pool, but does not disclose the average original loan size.91

d. Points Paid at Settlement

Many borrowers pay points to obtain lower interest rates. The number of points 

paid, if any, to the lender at the time of loan origination may also be related to likely 

prepayment behavior. Borrowers who expect to move quickly or are eager to refinance at 

the earliest opportunity generally seek to avoid points. Also, borrowers with relatively 

poor credit and higher default risk may be forced to pay points. Prepayment by these 

borrowers may be less sensitive to interest rate declines but more sensitive to 

improvements in their credit standing. Neither private-label, the GSEs nor Ginnie Mae 

MBS issuers typically provide this information. The GSEs do not currently collect such 

data. 

2. Property Information

Property characteristics may also affect expected prepayment and default 

behavior. The location of the mortgaged properties is of interest to investors, because 

differences in local or regional economies may affect borrowers. Also, state and local 

laws may affect the costs of refinancing or the costs of foreclosure. 

 

88 See Westhoff & Srinivasan, supra note 78, at 410. 89 See Id. 90 Fannie Mae discloses original loan size quartile data following settlement and has stated it will disclose 

this information prior to settlement beginning in March 2003. 

91 However, after settlement, Ginnie Mae discloses the number of loans in the pool, so the average original 

loan size can be calculated after settlement. Ginnie Mae has stated that it will disclose this information 

prior to settlement beginning in March 2003. 
35

a. Geographic Distribution

Because mortgage loan pools contain a number of mortgage loans, the mortgaged 

properties securing the mortgage loans in a single pool can be located over a diverse 

geographic area. Knowing the geographic distributions of the mortgaged properties aids 

in understanding concentration of credit and prepayment risk. A booming regional 

housing market, for example, could result in faster prepayment speeds, while a depressed 

regional job market might increase the credit risk of a pool. To the extent any adverse 

regional or local economic conditions exist, the smaller the number and the more 

geographically concentrated the mortgaged properties are, the greater the risk that any 

regional or localized economic factors will affect payments on the MBS.92

Private-label issuers typically disclose in their offering materials the number and 

aggregate principal balance of mortgage loans secured by properties in each state. They 

also disclose the percent of the total pool balance represented by loans in each state. 

Fannie Mae and Freddie Mac also provide this information prior to settlement. 

Geographic distribution information on mortgaged properties in Ginnie Mae MBS is 

provided quarterly following the MBS issuance. 

b. Property Types

The mortgaged properties can be different property types. Common types include 

single-family detached, high-rise condos, low-rise condos, two family homes, and three 

to four family homes. Property type is relevant in analyzing both prepayment and credit 

risk. Some types of homes, for example single-family detached homes, are often more 

marketable than others. If a servicer is required to foreclose on a property, there is less 

risk of loss with a more marketable home. Mortgage loans on single-family homes also 

default less often than mortgage loans on other types of residential properties.93

Private-label issuers typically disclose at issuance the number of mortgage loans 

and aggregate principal balance outstanding in each property type category, as well as the 

percent of the pool’s aggregate unpaid principal balance within each category. Fannie 

Mae and Freddie Mac segregate pools based on whether the mortgaged properties are for 

one to four families or more, but do not provide a breakdown of the type of single family 

homes. The required Ginnie Mae prospectuses mandate that issuers state whether the 

underlying mortgage loans are on single or multifamily residences, but no breakdown on 

type of single-family homes is required. 

c. Occupancy Types

The occupancy type of a mortgaged property indicates how the mortgage 

borrower will use the property. There are generally three types: owner-occupied; second 

 

92 State law can also affect prepayment rates, so it is important to investors to know if the loans are located 

or concentrated in any state where such laws might affect prepayment. 93 See FRANK J. FABOZZI & DAVID YUEN, MANAGING MBS PORTFOLIOS 134 (1998). 
36

home; and non-owner-occupied properties. Mortgaged properties occupied by the 

borrower default at a much lower rate than non-owner-occupied properties.94 Therefore, 

the occupancy type is relevant to analyzing credit risk of the pool. It is also relevant to 

prepayment modeling in that, as compared to owner-occupied properties, borrowers on 

investment properties are more likely to sell the property in an expanding housing market 

to lock in profits but typically experience more difficulty in refinancing due to greater 

documentation requirements.95

Private-label issuers typically disclose in their offering documents the number of 

mortgage loans, the aggregate outstanding principal balance, and the percent of the pool’s 

aggregate principal balance for each category of occupancy type. The GSEs do not 

provide any information with respect to occupancy types of the mortgage loans. All but a 

de minimis amount of loans in a Ginnie Mae single family pool are owner-occupied. 

d. Loan-to-Value Ratio

The loan-to-value ratio of a mortgage loan is a measure of the loan balance 

compared to the value of the mortgaged property. Typically disclosed as a percentage, 

LTV is determined by dividing the principal balance of the loan at the date of origination 

by a measure of the property’s value. In the case of a sale, the measure used is the lower 

of the sale price or the appraised value at the time of sale. In the case of a refinancing, 

the measure used is the appraised value of the property at the time of the refinancing. In 

a streamlined refinance underwriting, either the appraised value of the mortgaged 

property at the time the mortgage being refinanced was originated or an appraised value 

determined by a limited appraisal report at the time of the refinancing may be used in 

place of a full appraisal of the mortgaged property.96

LTV can be useful in assessing prepayment and credit risk of mortgage loans, and 

the likely severity of loss in the event of foreclosure. 97 LTV may serve as an indicator of 

how easily a borrower may be able to refinance or purchase a new home, thus prepaying 

the outstanding mortgage loan. Loans with higher LTVs are considered more likely to 

default because the borrower has less invested and has less incentive to retain ownership 

of the mortgaged property.98

Private-label issuers generally disclose in their offering documents the 

distribution of mortgage loans by original LTV in incremental ranges, for example, five 

percent increments from 50 percent to 95 percent. For each separate LTV range, privatelabel issuers generally disclose the number of loans, unpaid balance, and percentage of 

 

94 See Id. 95 See Westhoff & Srinivasan, supra note 78, at 424. 96 The appraised value used depends on the LTV percentage at the time of origination of the loan being 

refinanced. 

97 See LORE & COWAN, supra note 7, at 1-6. 98 See FABOZZI & YUEN, supra note 93, at 87-88. 
37

total pool balance. They also disclose the weighted average original LTV ratio for the 

pool as a whole. The GSEs and Ginnie Mae do not provide LTV data. 

3. Borrower Information

A borrower’s financial condition and borrowing purpose can also be indicative of 

future default and prepayment behavior. 

a. Credit Scores

Lenders use a credit score to rank borrowers according to credit risk. One popular 

type of credit score used is FICO, a credit scoring system developed by Fair Isaac and 

Company. FICO scores are intended to show the likelihood that an individual might 

default on a debt based on past credit history. To determine an individual’s FICO score, 

a credit reporting agency using the FICO system will analyze the individual’s credit 

history, including its length, current debt level, payment history, type of credit in use and 

other new credit inquiries.99

Some, but not all, private-label issuers disclose credit scores in varying 

incremental ranges, such as in 20-point increments. For each credit score range, they 

may provide the number of mortgage loans, the aggregate unpaid principal balance, and 

the percentage of total unpaid principal balance. Neither the GSEs nor Ginnie Mae 

discloses credit scores. 

b. Loan Documentation

Mortgage lenders have different levels of documentation that they require prior to 

making a mortgage loan. The level of documentation required varies with the purpose of 

the mortgage loan and the credit profile of the borrower. For some borrowers, mortgage 

lenders may be willing to accept less documentation than they usually require because of 

the presence of other positive credit factors. Lenders may also agree to originate a loan 

with less than the full level of documentation they might otherwise require in return for 

higher origination fees. 

Private-label issuers typically provide some loan documentation information. It 

may be as few as two categories, such as “full documentation” or “reduced 

documentation,” or it may be several different categories depending on what type of 

documentation levels the lender utilizes. A private-label issuer would typically disclose 

the number of loans and aggregate outstanding principal balance of mortgage loans 

underwritten with each level of documentation. The GSEs and Ginnie Mae do not 

provide such information. The GSEs do not currently collect data on categories of 

documentation types. 

 

99 See FABOZZI & DUNLEVY, supra note 21, at 112-13; Fair, Isaac and Company, Inc., List of FICO Score 

Factors (visited Jan. 13, 2003) <http://www.myfico.com/MyFICO/CreditCentral/ScoreConsiders/ 

FICOFactors.asp>. 
38

c. Loan Purpose

There are generally three potential reasons for a borrower to take out a mortgage 

loan: to purchase a home; to refinance an already-purchased home to obtain a lower 

interest rate or different payment term; or to refinance a home in order to obtain access to 

additional funds. The last type is commonly referred to as a cash-out refinance or equity 

take-out loan. Loans used to purchase homes due to the relocation of a borrower, which 

are a subset of “purchase” loans, are referred to as relocation loans or relo loans.100 

Investors use information regarding loan purpose to evaluate both credit and prepayment 

risk. For example, a forecasting model may assume that borrowers whose loan purpose is 

a cash-out refinance may have more credit risk101 and are more likely to default102 than 

borrowers purchasing a home. Conversely, borrowers who have refinanced in the past 

may have better credit, be more aware of refinancing opportunities, and, therefore, may 

be more likely or able to refinance in any future declining interest rate environment. 

Private-label issuers generally provide the number of loans in the pool that relate 

to each of these categories. The information provided also discloses the aggregate 

outstanding principal balance, and the percent of the pool’s aggregate principal balance 

by each loan purpose type. The GSEs and Ginnie Mae do not provide loan purpose 

information. 

d. Borrower Debt-to-Income Ratios

The ratios of borrowers’ required payments on their mortgage debt (or on all of 

their debt) to their income might provide additional information about their expected 

default and prepayment behavior. These ratios vary across lenders. While a mortgage 

loan originator’s underwriting standards may have certain debt-to-income caps for 

mortgage loans, private-label issuers typically do not disclose this information as to the 

particular mortgage loans in the pool. The GSEs and Ginnie Mae also do not provide 

debt-to-income information. 

4. Sellers, Originators, and Servicers

a. Seller Identification

The seller of a loan is the entity that sells the mortgage loan to the MBS issuer. 

The originator is the lender that made the mortgage loan to the borrower. Originators 

often sell the loans they originate directly to MBS issuers in order to obtain ready access 

 

100 See FABOZZI & YUEN, supra note 93, at 19. 101 See Westhoff & Srinivasan, supra note 78, at 425; Thomas Zimmerman & Kumar Neelakantan, Credit 

Performance of High LTV Loans in THE HANDBOOK OF MORTGAGE-BACKED SECURITIES, supra note 10, at 

329, 339. 

102 See Zimmerman & Neelakantan, supra note 101, at 339 (noting that cash-out refinancings reduce the 

equity a borrower has in the home). 
39

to additional lending capital. Because of this, the seller and the originator are in most 

cases the same entity. However, since whole loans may be bought and sold in the 

secondary market, it is possible for an entity to sell to an MBS issuer whole loans that it 

did not originate, in which case the seller and the originator are different. Moreover, 

sellers or originators may sell servicing rights. The identity of the originator of a loan 

could be relevant for both credit and prepayment risk. With regard to credit risk, it is 

important to identify those originators that have less stringent underwriting standards 

because they are likely to include loans with greater credit risk in MBS pools. Identity of 

the seller could also be relevant to prepayment to the extent the seller originates loans 

primarily in areas where there is greater prepayment of mortgage loans. 

In private-label offerings the seller’s name is disclosed in the prospectus 

supplement. Private-label issuers also sometimes disclose the amount of the pool, by 

number of loans or unpaid principal balance, which other lenders originated. Freddie 

Mac discloses the name of the seller prior to settlement and Fannie Mae discloses the 

name of the seller after settlement.103 For Ginnie Mae’s single-seller pools, the seller is 

disclosed prior to settlement. For its multiple issuer pools, the sellers are identified postsettlement. 

b. Servicer Identification

The servicer is the entity that collects payment of the underlying loans and 

distributes payments on the MBS to the MBS holders either directly or through a trustee. 

The servicer collects a fee for performing these responsibilities as set forth in a servicing 

agreement with the issuer of the MBS. Servicer identification may allow investors to 

make assumptions regarding the expected prepayment risk. Servicers can be either 

master servicers or subservicers.104 Mortgage research analysts currently compile reports 

ranking the prepayment speeds of mortgage loans serviced by different servicers.105 

Some servicers are also originators and they may try to solicit the borrowers into 

refinancing. In addition, pools may include loans that have different servicers or that 

have master servicers. 

Some private-label issuers may identify only master servicers in their offering 

documents, while others identify subservicers as well. Neither Fannie Mae nor Freddie 

Mac discloses the identity of servicers. In the Ginnie Mae I program the servicer is 

disclosed prior to settlement and in the Ginnie Mae II program the servicers are disclosed 

following settlement. 

 

103 Freddie Mac does not disclose the name of the seller for MBS issued under its cash program, where the 

pools include multiple sellers. Fannie Mae has stated it will disclose the name of the seller prior to 

settlement beginning in March 2003. 

104 Master servicers enter into the servicing agreement with the MBS issuer and are usually permitted to 

delegate some of their servicing responsibilities to other servicers. 

105 See, e.g., J.P. Morgan Securities, Inc., Mortgage Research, Mortgage Servicers Prepayment Report

(Apr. 8, 2002). Because the terms servicer and seller are frequently used interchangeably, it is not always 

clear as to which entity the information relates. 
40

IV. INFORMATION IMBALANCE ISSUES 

 

Some market participants have expressed concern that participants in the MBS 

markets use information they obtain in their capacities as originators, guarantors and 

servicers, among others, to select for purchase, sale or retention MBS or underlying 

mortgage loans that have more favorable characteristics than the average universe of 

MBS or mortgage loans. Assertions have been made that these entities have an unfair 

advantage over the marketplace generally in purchasing and selling MBS. In order to 

evaluate these concerns, it is important to note that at each level of the process of creating 

and selling MBS, the market participants involved will make certain choices about which 

mortgage loans or MBS to retain or sell. For example, lenders or pool sponsors select the 

underlying mortgage loans that they will securitize. Investors may also decide, at the 

time of a trade that they wish to purchase MBS having certain characteristics. 

 

To review concerns about “favorable selection” or “cherry picking” based on 

possible information imbalances, it is also important to understand that market 

participants might view a transaction differently. In order to understand how selection 

practices may raise issues in the markets, it is helpful to identify the situations that raise a 

concern for some market participants. 

First, some market participants are concerned that when other market participants 

routinely decide to keep purchased or created MBS in their portfolio, they are relying on 

information not generally available in making these decisions. In the MBS market, 

situations exist where a market participant may determine to buy, sell or hold a security 

or mortgage loan in its portfolio based on information in its possession and not otherwise 

publicly available. Entities have different reasons for determining to buy, sell or retain 

securities or mortgage loans, including their knowledge of the product and their business 

goals and objectives. Any entity involved in originating a mortgage, compiling a pool of 

mortgages for securitization or creating a MBS may have detailed information about the 

characteristics of the underlying mortgage loans. Determinations about what securities to 

keep or sell remain within the control of the originator, sponsor or holder of the MBS. 

The Task Force understands that information is not provided for various reasons, 

including the fact that specific information is not generated or available to the MBS 

seller, there has been a lack of market demand for particular information, or disclosing 

the information could cause competitive harm. MBS issuers and originators might not 

reveal all the information in their possession about the MBS. Some market participants 

have indicated that even if the information is revealed to the initial purchaser, such 

information may not be disclosed to the marketplace generally. 

A second concern expressed was that, in addition to having business reasons to 

keep MBS in their portfolios, market participants use information that is not generally 

available to make portfolio decisions. Once the MBS is originated, securitized or 

purchased, the originator, securitizer or purchaser may determine to keep the highest 

quality of the MBS in its portfolio. The decision to keep MBS or mortgage loans in a 
41

portfolio also may be made about lesser quality products where a market may not exist or 

may not provide a fair price for a lower quality asset. 

Purchasing, originating or securitizing MBS or a mortgage loan and keeping it in 

a portfolio may be desirable for a number of reasons, such as investment and other 

business reasons. This practice has been termed “culling.” It should be noted that market 

participants are under no obligation to distribute MBS or mortgage loans with any 

particular characteristics and that purchasers establish MBS prices according to their 

analysis of the relative value of the assets and the securities being offered.106 As with any 

other industry, MBS market participants are entitled to manage their own assets and 

portfolios. 

Finally, the Task Force heard that a central concern for market participants was 

that an originator or guarantor of MBS might purchase MBS in secondary trades through 

their investment arm based on information about particular securities not generally 

disclosed or available to the public, giving the internal or affiliated investment 

department the ability to use such information to the detriment of other prospective 

purchasers or sellers. Here the concern is that MBS sold into the market with information 

is purchased back at some later time based on information greater than that held by the 

current seller. The antifraud provisions of the federal securities laws prohibit persons 

from making fraudulent misuse of material inside information in connection with the 

offer and sale of securities.107 Bank regulatory and OFHEO rules also address this 

issue.108

Market participants generally have in place policies and procedures to assure 

compliance with legal requirements. The Task Force confirmed, for example, that Fannie 

Mae and Freddie Mac have written policies to address internal sharing of information. 

These policies include their codes of conduct that prohibit insider trading and their 

internal safeguards (termed “firewalls” or “information barriers”) that prevent 

information sharing among divisions, primarily loan level data acquired as part of the 

guarantor function for securitization that cannot be shared with the investment function 

that seeks to purchase MBS for portfolio. The goal of these policies is to prevent the 

trading desks at Fannie Mae and Freddie Mac from receiving information that is available 

only to Fannie Mae and Freddie Mac as a result of their purchases of underlying 

mortgage loans or in their capacities as guarantors. Under the policies, the trading desks 

should trade with the same information available to other market purchasers. The 

 

106 Further, regulated firms such as banks, thrifts and GSEs have legislative and regulatory incentives to 

maintain assets that are of a high quality. 

107 See 17 C.F.R. § 240.10b-5, 10b5-1 to 10b5-2. 108 See e.g., BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, TRADING AND CAPITAL MARKETS 

ACTIVITIES MANUAL §2150.1, at 212 (1998) (discussing conflicts of interest issues). For OFHEO rules and 

guidance see 12 C.F.R. § 1710.1-.20 (corporate governance rule; systems of internal control and conflict of 

interest standards) and 12 C.F.R. § 1720 apps. A (internal controls and information technology) & C 

(policy guidance-- safety and soundness standards for information). See also OFFICE OF FEDERAL HOUSING 

ENTERPRISE OVERSIGHT, EXAMINATION HANDBOOK at ch. 2 (1998)(internal controls and separation of 

duties and responsibilities). 
42

allegation was made that the GSEs’ own mortgage asset portfolios performed better than 

the outstanding MBS guaranteed by the GSEs. The Task Force found this in itself to be 

unpersuasive as the GSEs’ mortgage portfolios include other instruments and the GSEs, 

like other investors, may hold better portfolios by purchasing better performing MBS that 

they select on the basis of publicly available information for which they may pay a higher 

price. No evidence was brought forward of any impropriety in creating their portfolio 

mix. 

As part of its continuous examination of Fannie Mae and Freddie Mac, OFHEO 

reviews each GSE’s internal controls and corporate policies, including their firewall 

policies, and examines each GSE to ascertain its financial safety and soundness, 

including compliance with internal controls and policies. OFHEO reports annually to 

Congress on its examination findings and on any enforcement actions that OFHEO has 

undertaken that year. An OFHEO review of GSE practices and data on portfolio 

prepayment performance did not support a conclusion that “cherry picking” occurred.109 

In interviews in connection with preparing this report, no market participant presented 

substantiated evidence to the contrary. As primary regulator of the GSEs, OFHEO will 

continue to closely monitor GSE compliance in this area. 

 

109 It should be noted that slower prepayment speeds are not necessarily indicative of “cherry picking.” 
43

V. FINDINGS 

The Task Force made the following findings based on its review of current 

disclosures in the mortgage-backed securities markets and its consideration of 

enhancements to such disclosure. 

1. Additional Pool Level Disclosures Are Justified and Expected to have Minimal 

Disruption on the Functioning of the MBS Markets

The purpose of this study was to examine the current state of disclosure in the 

markets for MBS with a view to determining whether enhancements in disclosure 

practices would be useful. The Task Force finds that, given the current state of the MBS 

market, enhanced disclosure by MBS issuers – particularly by the GSEs that issue 

securities in these markets – would be both justified and feasible on a pool (aggregate) 

basis. 

Disclosing a broader amount of information could assist investors in their 

decision-making, improve efficiency, pricing, and market confidence, and, insofar as it 

improves market quality and transparency, enhance safety and soundness. The Task 

Force believes that carefully selected and implemented enhancements can also be made 

without disruption to the functioning of the current market, particularly the TBA market, 

or unreasonable cost to market participants. Collectively, the U.S. MBS markets are the 

predominant sector of U.S. fixed-income markets. In general, the Task Force finds the 

MBS markets for GSE and Ginnie Mae MBS to be robust, flexible, efficient and liquid. 

The TBA market, which is the forward commitment market for pass-through MBS, is the 

largest, most liquid, and perhaps most important of these markets. Because the TBA 

market consists entirely of GSE and Ginnie Mae MBS, the Task Force has focused its 

attention on this market. 

Market participants agree that the TBA market is vital to the efficiency, 

flexibility, and liquidity of the GSE and Ginnie Mae MBS market, which are the largest 

component of, and the benchmark for, the MBS markets. As the TBA market has 

evolved, the GSEs have progressively expanded their disclosures with little adverse 

impact on the market. In fact, these additional disclosures have enhanced market 

transparency, confidence, stability, and discipline. Although the GSEs have indicated 

that they regard the current level of disclosure as adequate, many large and smaller 

market participants indicated that they would find timely disclosure of additional 

information useful, primarily for enhanced prepayment risk analysis. As discussed 

below, prepayment risk analysis has become more sophisticated in recent years. Some 

market participants perceive issues of information asymmetry given these changes in 

prepayment risk analysis and other developments in the MBS market in recent years, 

including mortgage industry consolidation, a marginally less homogenous TBA market 

due to increased volumes of stipulated trades, and the growth in GSEs’ retained 

portfolios. 
44

During the study, the GSEs and some market participants maintained that 

additional disclosure could adversely affect liquidity or efficiency in the TBA market by 

fragmenting the market. However, even the GSEs acknowledge that the TBA market is 

more liquid than ever before, while it is less homogenous and more fragmented than it 

was five or six years ago due, in part, to increasing sophistication of borrowers and 

investors, greater refinements to prepayment models, and, as a result, more stipulated 

trades. The first step in the current pooling process can, therefore, involve screening 

loans for characteristics, including those related to prepayment risk, that may command a 

premium on the TBA market. 

The Task Force finds more persuasive the arguments of other investors and 

market participants who counter that any adverse effects from additional disclosure 

would be short-term, and ultimately would be outweighed by the benefits of greater 

information flowing into, and therefore more informed analysis of, the MBS market. For 

example, enhanced disclosure could better enable investors to analyze and predict 

prepayments and other risks, which may help them to make more informed investment 

decisions. While this might lead to some further fragmentation, it should also eventually 

result in more efficient pricing of mortgage products available to individual borrowers. 

TBA pricing is the basis for pricing for other segments of the MBS market, and, 

therefore, improvements in TBA pricing could extend to the pricing of other MBS 

products. 

2. Implementation of Additional Disclosures Through Market Action

The market participants the Task Force interviewed identified a large number of 

possible disclosure items. Of the possible additional disclosure items identified in the 

interviews, this report highlights those disclosure items that a significant number of 

participants said may have predictive value in analyzing prepayments. Within this group 

of highlighted disclosure items, the Task Force also considered whether the information 

is reasonably available. The Task Force believes investor interest and issues of 

practicality should be important determinative criteria as to whether and under what 

circumstances particular disclosure items would add value and market participants and 

the market would best make these determinations.

The Task Force believes that additional elements of disclosure in the MBS market 

could be determined and implemented, as it has in the past, through guidelines agreed 

upon by market participants, including large and small investors, broker-dealers, industry 

groups and other market participants. Such determinations could include the appropriate 

timing and method of providing additional disclosure. As a supplement to this process, 

the GSEs could create greater homogeneity by revising their underwriting guidelines or 

pooling requirements. If market forces are unable to reach consensus on disclosure 

enhancements, the agencies represented on the Task Force will need to consider what 

additional action might be appropriate. 
45

3. Potential Items Suggested for Enhanced Disclosures in the MBS Markets

During Task Force interviews with various market participants a number of items 

were repeatedly mentioned as candidates for enhanced disclosure especially with regard 

to TBA-eligible securities. The Task Force found that market participants generally 

sought aggregate pool information - as opposed to loan-level information - perhaps 

expressed in quartiles or other standardized breakdowns. Based on current mortgage 

underwriting and purchase practices - automated and otherwise - disclosure of certain of 

these items may be more readily achieved than others. 

Market participants suggested that the following additional pool-specific 

information would present few practical obstacles: 

• loan purpose (i.e., whether a purchase or refinance) 

• original loan-to-value (LTV) ratios 

• standardized credit scores of borrowers 

• servicer for the pool (this may not always be the seller or originator) 

• occupancy status (owner-occupied or investor) 

• property type (e.g., detached, condo) 

The Task Force believes that these additional disclosures could benefit the MBS 

markets and urges market participants to give serious consideration to implementing 

these disclosures. 

The above information is generally collected by loan originators and, to the extent 

it is not already, could be provided to whole-loan mortgage purchasers (i.e., MBS 

issuers), and passed on in appropriate form to market participants. For example, GSEs do 

not receive standardized credit scores from sellers for all mortgage loans, but the 

information is not difficult for the GSE issuer to obtain. Although the items listed above 

may not present practical difficulties, they may entail data quality issues. For example, it 

was noted that the timing of a credit rating might affect the borrower’s score. Similarly, 

the quality of LTV data may be affected if, for example, originators do not use updated 

appraisal information in calculating the LTVs for mortgage loans. 

In addition to the list of items set forth above, a number of other possible 

desirable disclosure enhancements were mentioned in interviews with market 

participants. Although the consensus is less clear with respect to these items, the Task 

Force believes they should be given consideration as subjects of enhanced disclosure. 

Other requested information included debt-to-income ratio, points paid, and level of 

documentation (e.g., high, medium, low). The Task Force heard from some market 

participants about possible drawbacks to collecting and disclosing this information. For 

example, Fannie Mae and Freddie Mac generally do not collect information on points 

from loan originators. With respect to documentation, because different lenders employ 

different standards (e.g., “low doc” may mean different levels of documentation to 

different lenders), industry-wide standards or common nomenclature would need to be 

devised and implemented. Finally, although debt-to-income is often available from 
46

lenders, it is subject to the varying standards originators use to verify the borrowers assets 

and liabilities. 

4. The Task Force Did Not Receive Substantiation of Allegations of Improper Activity 

Based on Information Imbalances

Apart from issues of disclosure, the Task Force also heard allegations of selective 

selling and purchasing practices tied to possible information imbalances, so-called 

“cherry picking.” The allegations included claims that Fannie Mae and Freddie Mac 

have made improper use of non-public information for trading purposes. No evidence 

was brought forward to the Task Force, including by those making allegations, that 

would have substantiated these claims. Moreover, the GSEs maintain policies intended 

to prevent improper information sharing. Further, slower prepayment speeds in retained 

portfolios of the GSEs is not totally unexpected because the GSEs, like private issuers 

and loan originators, may sell or purchase MBS with a goal of creating and maintaining 

their own strong portfolios. 

5. Ginnie Mae Enhancements to MBS Market Disclosures

Ginnie Mae indicated to the Task Force that, as a matter of policy, it believes that 

full and accurate disclosure on all aspects of its MBS and underlying collateral is 

important. Ginnie Mae has developed, and continues to refine, procedures for monitoring 

and disseminating information relating to its MBS. 

Ginnie Mae is currently in the process of evaluating the enhancement of 

disclosure of information on its securities. In particular, Ginnie Mae has been asked by 

market participants to provide credit information, such as credit scores and loan-to-value 

ratio information. Ginnie Mae is reviewing these requests in light of information 

available to it and its ability to obtain accurate information. Ginnie Mae has advised the 

Task Force that certain items of requested information are not required to be provided 

under the FHA, VA or other relevant underwriting guidelines for Ginnie Mae eligible 

mortgage loans. 

6. Regulatory Oversight

The Treasury, OFHEO and the Commission expect to monitor the MBS markets 

in general, and the TBA market in particular, to evaluate the implementation and impact 

of disclosure enhancements, in assisting investors in evaluating securities in the MBS 

markets and making informed investment decisions. If future developments warrant, the 

Task Force members, in their separate capacities or jointly as they agree appropriate, 

could consider what additional steps may further enhance disclosures to investors in the 

MBS marketplace. 

In addition, with regard to non-exempt securities offerings, including MBS, the 

Commission is continuing to study the need for a comprehensive regulatory framework 

for all registered asset-backed securities offerings. OFHEO is continuing its oversight 
47

and examination of the GSEs’ operations and practices in their role as the GSEs’ safety 

and soundness regulator. 
A-1 

APPENDIX A 

Meetings and Interviews 

The Task Force interviewed the following firms, groups and individuals: 

The Bond Market Association 

Alan Boyce, Portfolio Manager, Soros Fund Management 

California State Teacher’s Retirement System (CALSTRS) 

Countrywide Home Loans, Inc. and Countrywide Securities Corporation 

Fannie Mae 

FM Watch 

Freddie Mac 

Ginnie Mae 

Dr. Dwight Jaffee (Haas School of Business, University of California, Berkeley) 

Mortgage Bankers Association of America 

Scott Simon of PIMCO 

Phillip Thigpen, Jr. (Phillip Thigpen, Jr., a financial advisory firm) 

Peter Wallison (American Enterprise Institute) 

Washington Mutual Bank, FA, Washington Mutual Mortgage Securities Corp., and Long 

Beach Mortgage Company 
B-1 

Summary of Part III.E., “Types of Disclosure” 

These tables summarize the information in Part III.E., “Types of Disclosure.” The tables compare the content of disclosures provided by Gin

respect to their pass-through MBS offerings and private-label issuers, generally, with respect to their REMIC offerings, in each case, except 

to settlement.1 The tables do not address differences in the timing of pre-settlement disclosure or amount or frequency of any ongoing disclo

made to the detailed discussion in Part III.E. 

Loan Terms Fannie Mae Freddie Mac2 Ginnie Mae 

Disclosure Item (Pass-through MBS) Weighted average coupon Yes Yes Yes Distribution of loan coupons within pool Yes, post-settlement3,4 Yes Variable5 Weighted average remaining term to maturity Yes Yes Yes Distribution of remaining terms to maturity or loan maturity year within pool Yes, post-settlement4 Yes No Weighted average loan age Yes, post-settlement4 Yes Yes Distribution of loan ages or loan origination years within pool Yes, post-settlement4 Yes No Weighted average original loan term Yes, post-settlement4 Yes Yes Distribution of original loan terms within pool Yes, post-settlement4 Yes No Latest maturity date of loans in pool Yes Yes No Number of loans in pool Yes Yes Yes, post-settleUnpaid principal balance Yes Yes Yes Average original loan size Yes Yes Yes, post-settleDistribution of original loan sizes within pool Yes, post-settlement4 Yes No Points paid No No No 

Property Information Fannie Mae Freddie Mac2 Ginnie Mae 

Disclosure Item (Pass-through MBS) Distribution of mortgaged properties' geographic locations Yes Yes Yes, post-settleDistribution of property types within pool (e.g., single-family detached, high rise condo, low rise condo) No No No Distribution of occupancy types within pool (e.g., owner-occupied, second home, non-owner-occupied) No No Yes7 Weighted average original loan to value ratio No No No Distribution of original loan to value ratios within pool No No No 
B-2

Borrower Information Fannie Mae Freddie Mac2 Ginnie Mae Disclosure Item (Pass-through MBS) Distribution of credit scores within pool No No No Distribution of loan documentation information (e.g., full, reduced, streamlined) No No No Distribution of loan purpose within pool (e.g., purchase, rate/term refinance, cash-out refinance) No No No Debt to income ratios of borrowers No No No 

Seller, Originator and Servicer Information Fannie Mae Freddie Mac2 Ginnie Mae 

Disclosure Item (Pass-through MBS) Seller identity Yes, post-settlement4 Yes8 Variable9 Portion of pool originated by others than seller No No No Servicer information No No Yes 

1 Because of the relatively diverse group of issuers in the private-label market, there is substantial but not complete uniformity to the inform

 offering materials of SEC-registered private-label MBS. As to private-label issuers, therefore, the chart indicates the typical or normal pr

 disclosure, as discussed further in the text. As a result, where it is indicated in the charts that disclosure is provided there are almost certa

 disclosure is not provided. Conversely, where it is indicated that disclosure is not provided, there may well be cases where such disclosur

 chart indicates that practice is variable for private-label issuers, the Task Force has been unable to identify a significantly predominant pa

 category. 

2 The discussion in Part III.E. of the report addresses the content and timing of disclosure for Freddie Mac’s swap program. Freddie Mac’s 

 approximately 85% of its fixed-rate pass-through MBS issuances. For its cash program, Freddie Mac usually provides similar disclosure,  within two weeks following settlement of the TBA trade. 

3 Prior to settlement, Fannie Mae discloses the highest and lowest annual interest rates on the loans in the pool. 4 Fannie Mae has stated it will begin disclosing this information prior to settlement in March 2003. 5 In the Ginnie Mae I program the coupon rate for all loans is disclosed. In the Ginnie Mae II program, the range, but not the distribution, o6 Ginnie Mae has stated it will disclose the number of loans in the pool prior to settlement beginning in March 2003. At that time it will be 

 average original loan size prior to settlement. 

7 All but a de minimis amount of loans in a Ginnie Mae single-family pool are owner-occupied. 8 Freddie Mac discloses the seller in its swap program but not in its cash program, where the pools include multiple sellers. 9 For Ginnie Mae’s single-seller pools, the seller is disclosed prior to settlement. For its multiple-issuer pools, the sellers are identified post