Introduction to the Cash Window
There are two methods for securitizing loans in Agency GSE MBS: swapping loans for a security (Swap) or selling the loans outright for cash (Cash Window). The first method is the dominant securitization method used by single originators who are able to assemble a large number of mortgages. The Swap channel can also be used by large originators for constructing multi-lender pools with specified collateral where it is not easy for any single originator to accumulate enough loans with the desired range of characteristics. Smaller sellers tend to utilize the Cash Window and the loans sold by them through this channel are pooled with those from other small lenders. The pooling process for Cash Window MBS is fully under the control of the GSEs; in effect, they are behaving like a whole loan conduit (Note that there is no notion of the Cash Window for Ginnie Mae MBS).
For a small lender, the choice between the two multi-lender securitization options is driven by pricing and liquidity needs. Specified pool execution is usually poorer through the Cash Window but there may be times when the need for cash trumps pricing concerns as was witnessed by heavy non-bank use of the Cash Window channel in the lender liquidity crisis of early 2020. Consequently, monitoring trends in Cash Window issuance potentially gives us important insights into mortgage industry dynamics. Also, prepayments on cash window pools can be viewed as a proxy for loans that were originally delivered to the correspondent channel of the large banks but were then shifted to the cash window post the 2007-2009 Financial Crisis as large banks deemphasized their role as aggregators. Unfortunately, this signal has been somewhat attenuated by Fannie Mae's recent pooling practices as we discuss below.
It is straightforward to identify the three core types of securitization execution for Freddie Mac pools: Single-lender Swap, Multi-lender Swap and Cash Window, since each execution type is mapped to a different sequence of pool numbers. For Fannie Mae pools, all Cash Window pools originated through the Whole Loan Conduit (WLC) have AB, AS, or CA as part of the pool number. However, the WLC also delivers cash window loans into Fannie Mae Majors, where they can be commingled with loans securitized through a swap. Consequently, we have only a partial window into the true extent of Fannie Mae cash window activity.
Trends in Cash Window Issuance
It is easiest to see the evolution in the usage of the Cash Window by looking at Freddie Mac data. Detailed execution data is only available starting mid-2013 but some level of backfilling is possible by using the data compiled in a 2014 report compiled by the FHFA OIG which reports to the 2003-2007 level of cash window issuance (for both GSEs) as averaging between 5-10%, 10-20% from 2008-2011 and greater than 20% in 2013. Starting mid-2013, Freddie Mac started pooling cash window loans in a distinct range of pool numbers which allows for direct identification of such loans. In June 2019, the data set regarding the range of pool options was further richened by also showing the breakdown of swap pools as single or multiple-seller. The graph below relies on this latest set of data since it allows the most granular tracking of trends.
The trend we get an abbreviated glimpse of in the figure can be attributed to two somewhat related developments. Post-2007, we have experienced a dramatic fall in the concentration of the industry. In 2003, the top 5 sellers had a market share of 70%. Now, it's closer to 30% because of the decline in correspondent lending by the major banks who exited the sector en masse because of rep and warranty risk and the treatment of large servicing portfolios by Basel III, among other factors. Smaller sellers that once sold into these banks now go directly to the cash window, thus boosting the share of the cash window to a typical run-rate of 40-50%.
Another post-2007 transformation is a dramatic increase in the number of non-bank originators, for essentially the same set of reasons . One core structural feature of these institutions is that they generally have less access to a reliable source of short- and medium-term liquidity and were essentially forced to resort to the cash window in the liquidity crunch of March 2020. This explains the mini-trend we see in the last few months of the graph where the percentage of cash window suddenly jumps again to the 60s.