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The Correspondent Channel vs. The Agencies

Important to weigh your decision before picking your buyer.

Rob Chrisman
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Rob Chrisman
Rocks balance on a beam

For many years Fannie & Freddie have competed against aggregator pricing, and vice versa. Through co-issue execution, Freddie and Fannie’s end-run around the large aggregators and marketing directly to the small and mid-sized lenders is well known in the industry. But smaller lenders may not have the expertise or experience in analyzing some basic decisions between selling loans directly to F&F (through the cash window) or securitizing loans themselves. It is helpful to have a primer on what that means, and knowing what might be going on behind the scenes influencing your decisions.

To cash, or to swap, that is the question. If you work in secondary marketing, you no doubt have been asked, at some point, whether it is more profitable to trade agency product for securities, or for cash. As many know, approved lenders have the business luxury of either swapping closed loans they originate for mortgage-backed securities or selling these loans directly to FNMA/FHLMC in exchange for cash (known as “cash window” sales). The share of Fannie and Freddie loans securitized through the cash-window fluctuates monthly and yearly, depending on the appetite of Freddie and Fannie. 

There are some common misconceptions about cash window transactions, and the collateral and prepay differences, if any, between pools securitized through the cash window and the MBS swap programs. It’s important to understand who uses the cash window option, why, and whether or not there are differences in pool characteristics. 

When originators sell loans via the cash window, the GSEs aggregate the loans from a large pool of lenders and securitized them as an MBS; the cash window option allows both Fannie and Freddie to make short-term use of their balance sheet without interfering with their current mandate of continued reduction in their retained mortgage investment portfolio. Why would a secondary marketing department choose to sell in this fashion? Simple: speed and efficiency. The agency cash window typically alleviates warehouse line concerns, a problem which plagues many small originators, by way of faster fundings. Also, borrower retention is maintained as well. 

Typically, smaller lenders selling their loans to larger lender aggregators sell servicing rights as well. The cash window allows smaller lenders to retain their customer base, while allowing them to continue to originate new loans. And finally, an added benefit to the cash window lies in the small arbitrage (implied or otherwise) between “best efforts” and “mandatory.” 

As noted above, a lot of the benefits of selling cash window are really comparative advantages for the smaller lender; maybe this is why I hear so often the phrase “we utilize the cash window” from Capital Markets veterans. Historically, smaller lenders had two options: sell your loans to FNMA/FHLMC, or sell to a large aggregator. As large aggregators have been closing the correspondent channel, small originators have become central contributors in the cash window securitization model.

It’s critical to look at the collateral characteristics of cash vs. swap channels in order to understand the more important concept of prepayment. There are similar collateral characteristics between the two, although throughout the years the weighted average coupon (WAC) for loans being securitized through the cash window has been lower than loans being securitized through the MBS swap program. 

Loan size for purchase loans securitized through the cash window have been lower than purchase loans securitized through the MBS swap program (loan size of refinance loans securitized through the cash window are higher than refinance loans securitized through the MBS swap program), the TPO percentage for purchase and refinance (non-HARP) loans securitized through the cash window is noticeably lower than similar loans securitized through the MBS swap program. 

With similar collateral characteristics between the two channels, there isn’t much of a difference in prepayments. In addition, it is possible that additional measures taken by the GSEs ensure that prepays are comparable as well. Fannie Mae specifically monitors prepayments of pools created from the cash window and compares the performance to similar pools created through the MBS swap program. To the extent that prepays on cash window pools are significantly faster than similar pools created through the MBS swap program, a conversation with the lender may occur to understand possible reasons for the differences. As an added incentive, if necessary, Fannie Mae may limit or discontinue a lender’s activity through the cash window.

As we move through 2022, one would expect smaller lenders to continue to sell to FNMA/FHLMC cash-window desks given that larger lenders have scaled back on their role as aggregators. Or sell directly to the aggregators, depending on the price. 

Consequently, it is likely that the percentage of pools securitized through the cash window continues to increase if not stay at current elevated levels. Given the comparable collateral characteristics and increased oversight by the GSEs on participating lenders, prepays on pools securitized through the cash window are likely to be comparable to pools securitized through the MBS swap program.

With all of that said, the secondary marketing staff of practically every lender weighs the decision, assuming the company is approved, of selling to the agencies or to the correspondent aggregators. And while “cash is king,” there are often case-by-case reasons that a particular agency loan will be destined for a particular investor. And it is important to know why.

This article was originally published in the Mortgage Banker Magazine September 2022 issue.
Rob Chrisman
Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 35 years ago. He is on the board of directors of Inheritance Funding Corporation, of Doorway Home Loans, of AXIS Appraisal Management, and of the California MBA. He is also a member of the Secure Settlements Advisory Board, an associate of the STRATMOR Group, and of the Mortgage Bankers Association of the Carolinas and its membership committee.

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