One way of assessing the liquidity for a particular MBS coupon is to calculate its float, the amount that is free to trade. This is equal to the total outstanding balance of the coupon less the amount that is locked up (or restricted) in other securitizations, or held by investors who do not (or cannot) trade regularly. Specifically, some fraction of the outstanding balance of an Agency MBS can be locked up for the following reasons:
Pool Lock Up. A pool that contains other pools is generally known as a Level 2 pool, or more specifically as a Mega, Giant, Platinum, or Super depending upon the issuing Agency. Note that Level 2 pools can be contained in other Level 2 pools;
CMO Lock Up. Collateralized Mortgage Obligations (CMOs) restructure the pass-through cash flows of mortgage pools to create bonds with a wide range of duration and prepayment profiles. The collateral for CMOs is most often Agency pools but can consist of whole loans or even other CMO bond classes.
Mirror Exchange. Portions of 45-day delay Freddie Mac Gold pools can be exchanged for 55-day delay Mirror securities (see below for further details).
Fed Lock Up. A pool can have been bought by the Federal Reserve ("Fed"), which typically does not sell securities. Of course, there are other long-term investors who do not frequently trade their holdings but these entities are not accounted for in our analysis since they do not regularly release CUSIP-level information on their holdings.
We need to keep some accounting notes in mind as we calculate the lockup amount for each pool. For example, when the Fed holds a Level 2 pool, clearly it also holds all the underlying pools, whether Level 1 or Level 2. But, how should we account for all these pools from the perspective of lockup? If we do count all relevant Level 1 and Level 2 pools as being held by the Fed then we have to be careful not to double count when calculating total Fed holdings by aggregating over pools. One way of avoiding the double counting of balances between a Level 2 pool and its collateral is to distinguish between direct and eventual lockup. The direct convention avoids double counting by just focusing on the immediate parent of a pool. For example, in this convention, if pool A is held in a Level 2 pool B, which in turn is held in CMO C, we would say that A is locked up in Level 2 pool B, while B is locked up in CMO C.
At an individual pool level (for both Level 1 and Level 2 pools), we use the following expression to calculate float:
Float = Outstanding - (Level 2 Allocation + CMO allocation + Fed Allocation)
Thus, at the level of an individual pool, the amount tradable is the amount that is unallocated elsewhere. On the other hand, if we aggregate all pools belonging to a specific MBS coupon, pools that are locked up in other pools don't really change the tradable float in a coupon. Effectively, a Level 2 pool just repackages the cash flows of the underlying pools and does not act to restrict the amount that's tradable. This is in contrast to when a pool is locked up in a CMO or on the Fed's balance sheet. Thus, the float for any MBS coupon is the sum of the floats for all Level 1 and Level 2 pools with that coupon.
Uniform Mortgage-backed Securities (UMBS) have a complex genesis which dates back to the 2008 conservatorship of the GSEs under a new regulator, the Federal Housing Finance Agency (FHFA). The conservatorship resulted in the creation of a strategic plan with one point of emphasis being the creation of a common securitization platform to manage most of the GSEs’ securitization activities, including the issuance by both of a single mortgage-backed security, the UMBS. The idea was to improve the efficiency and liquidity of the Agency MBS market by offering mortgage investors a standardized "common" security that is TBA-eligible.
New UMBS are essentially modeled after existing Fannie Mae MBS and have a 55-day payment delay (the payment delay is the number of days from when the borrower’s interest begins to accrue on the mortgage to when the investor gets paid), compared to 45-days for legacy Freddie Gold MBSs. The similarity extends all the way down to pool prefixes - prefixes for UMBS pools are aligned to the current prefix convention for Fannie Mae TBA-eligible securities: CL for 30-year MBS, CI for 15-year MBS etc. By definition, UMBS are collateralized by fixed-rate loans purchased by either Fannie Mae or Freddie Mac (no commingling is allowed in UMBS). UMBS are considered to be Level 1 securities.
The UMBS market went live on June 3rd, 2019 and has dominated Agency MBS trading since then. It has also steadily changed the way market participants look at MBS; instead of focusing on Fannie Mae and Freddie Mac securities separately, investors now aggregate across the different Agencies. This has been made possible by the FHFA requiring that the two GSEs have aligned policies, programs and practices when it comes to MBS issuance, and furthermore that any material misalignment in prepayment speeds between Fannie Mae and Freddie Mac pools needs to be reported and remedied. The takeaway from the perspective of float calculations is that estimating the tradable amount in any coupon now involves aggregating across both Agencies.
Some questions immediately pose themselves: How do Level 2 pools fit into the UMBS picture and should legacy 45-day Gold MBS be included in UMBS float calculations? We address these questions in the next two sections.
Supers are Level 2 pools that contain UMBS with the crucial point being that a Super can contain a security that is issued and guaranteed by either Fannie Mae or Freddie Mac. In other words, Supers allow for commingling the issuance of both GSEs. Supers can be backed by UMBS or other Supers.
Mirrors address the issue that a significant volume of previously TBA-eligible Freddie Mac issued MBS would not qualify for UMBS or Super issuance and consequently would not be TBA-eligible either because of their non-standard payment delays.
To remedy this, an existing Gold PC (Freddie Mac’s legacy 45-day payment delay MBS) can be exchanged for a mirror security with a 55-day payment delay and the same characteristics as the Gold MBS such as unpaid principal balance, pool factor, weighted average coupon etc. The mirror is collateralized by the same loans as the Gold PC. Since the UMBS investor payment cycle is 10 days later than Freddie Mac’s payment schedule investors are paid a fee (“float compensation”) when exchanging their legacy Freddie Mac securities for a UMBS.
To facilitate the exchange process, Freddie Mac issues 55-day mirror securities on a one-for-one basis for all exchange eligible 45-day Freddie MBS Golds. While Mirror pools are ultimately backed by the same loans that back the exchanged 45-day pools they have new CUSIPs, prefixes, issuance dates and pool numbers.
Both Level 1 Gold PCs and Level 2 Giants can be exchanged for a Mirror. A Mirror security can be considered to be a Level 2 security since in some sense it contains (either in part or whole) the underlying Gold pool.
To provide further texture on some of the relevant calculations we'll review an example of some float-related calculations for Agency pools that are TBA-eligible in the table below.
The first set of calculations for coupon cohorts focuses on Fannie Mae and Freddie Mac 30-year Level 1 pools because these serve as the ultimate collateral for all other resecuritizations. Freddie Mac outstanding amounts represent the sum of all new 55-day Freddie Mac MBS (excluding Mirrors) plus all 45-day Golds. Freddie Mac 30-year 45-day pools are included in the float calculations since they can be exchanged for TBA-eligible mirrors. Filtering for Level 1 pools automatically excludes Mirrors and therefore avoids double-counting balances.
As per our Float formula above, we can estimate the total tradable float in pools by summing all float balances in Level 1 and Level 2 pools. For any individual pool, we use our lockup databases to properly account for the amounts allocated to CMOs or the Fed. These locked-up amounts are summarized in the CMOLock and FedLock columns in the table.
We can further decompose the Float into securities that can be traded as Specified Pools or securities that are TBA Deliverable. Specified Pools are individually identified by mapping them to various prepayment stories. New issue pools (and seasoning in general) are excluded from the list of stories because these stories can potentially be delivered as TBA for at-the-money and out-of-money pools, and even in-the-money pools if the roll is special.