As 2022 wound down, nearly every company involved in residential lending had been impacted by higher rates, lower volumes, and revenue, and a sense that 2020 and 2021 were indeed the best years the industry may ever see. In the secondary markets, the options have changed little this year, and the projections that Non-QM volumes would skyrocket have fallen short.
And thus, we have another year where Freddie Mac and Fannie Mae are the dominant players and expected to be for some years to come. And let’s face it: having that government stability is not such a bad thing compared to private-label security shifts.
But the timing of when the loan finds its way to Fannie and Freddie (the agencies) varies. Put another way, large and small banks, credit unions, and independent mortgage banks can sell conforming conventional loans to large aggregators/correspondent investors, or directly to the agencies. Fannie & Freddie’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 (yet) 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 capital markets decisions.
Cash Or Swap?
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 varies over time. 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 securitize 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.