The Journey to Securitization: Understanding Pricing Inputs

19 May, 2021

Plan. Prepare. Coordinate. Communicate.

As Black Knight continues to help lenders prepare to shift to from cash window to securitization delivery, these four words remain fundamental to our guidance. In a recent blog article, we offered recommendations for success, and encouraged you to plan and prepare for securitization, while maintaining robust coordination and communication with your secondary marketing team, to avoid agonizing over securitization. The additional recommendations below will continue to help you do just that.

At this stage in the game, you likely have a fundamental understanding of the securitization process. Today, I’m going to take a deeper dive into a critical piece of the process: the various assumptions that are used to drive best execution.

First, I think it’s worthwhile to reiterate a few important points. Securitization is an exciting opportunity, and I cannot emphasize that enough. Lenders that embrace it may realize a number of powerful benefits – particularly, greater control and knowledge of how lending profiles impact end pricing, as well as more transparency of the individual components of pricing. Keep these important perks in mind, especially if the technical aspects of the process feel unfamiliar and overwhelming.

Understanding Pricing Inputs

There’s no denying that securitization comes with more assumptions to manage than cash window delivery. In fact, that difference may be the most intimidating part to those new to the process. Let’s take a look at some.

Similar to GSE cash window delivery, MBS prices may be supplemented with specified pay-ups. Specified pay-ups are premiums broker-dealers will pay for specific types of collateral, and examples could include loans from a certain state or under a certain amount. Lenders can source specified pay-up indications from broker-dealers or pricing compilers, such as Black Knight.

MBS pools are traded at the coupon level, and one of the fundamental tasks for a lender is to determine into which coupon a given note rate should be delivered. This is done using the government-sponsored enterprises’ (GSEs) buy-up/buy-down grids, which are typically updated monthly. These figures are then evaluated against your guaranty fee – the note-rate strip you’re remitting to Fannie Mae or Freddie Mac to have an agency wrapper around the pool.

Lenders also need to consider servicing and carry to determine MSR valuation, be it retained or released. In some cases, relatively high note rates are delivered into relatively low coupons, which presents something we call excess servicing. And, you guessed it, that must be valued, too – along with all the standard credit-based adjustments you’re used to from aggregator and cash window delivery.

Once you identify your various pricing inputs, they can be organized and used to derive best execution pricing.

Keep an eye out for more preparatory topics in future webinars and blog articles. With the clock ticking to Jan. 1, 2022, it’s important to remain focused on preparing your operations to deliver via securitization. Black Knight is committed to helping you plan, prepare, coordinate and communicate through to the finish line!