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.