Whole Loan vs. MBS

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mni

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Just want to clarify with people who work with mortgage products. These two are different things, right?
 
I suppose you could say that a whole loan is the simplest possible MBS but usually MBS refers to securities made from pooling whole loans.
 
“Just want to clarify with people who work with mortgage products. These two are different things, right?”
Quite. To Joey’s point, the average loan is in the ballpark of $200K. The average MBS is in the ballpark of $1B.
 
Do they exist in parallel? Or whole loans eventually become MBS in the case of residential mortgage?
 
Plenty of banks still hold whole loans in their own portfolios. They can be bought and sold and you can originate them to and from your friends for fun and profit. And if someone wants to buy them for creating an MBS and you want to sell them, you can do that too.
 
That’s actually been an issue among originators for some time - banks like Countrwide and WaMu have been accused of “cherry-picking” the best loans to hold in their own portfolios while securitizing their riskiest loans into MBS.
 
thats like saying money managers “cherry pick” the best stocks/bonds to buy into their portfolio… welcome to capitalism
 
Well Joey, if you want investors to buy your securities and you’re seen as only packaging up ish into your originations, then you’re going to have trouble getting those off your books.
I’m not saying I wouldn’t do the same, it’s just an issue that got traction with the poor performance of resi’s last year.
 
“Anyway, I was pretty sure the structure eliminated all risk. ;-)”
Joey, I didn’t know you were in sales :P……….”you see, if tranched correctly and given enough credit enhancement, these mortgages that people won’t pay because they have ishy credit are really a great product to securitize”………..raise your hand if you weren’t drinking that Kool-aid for the past few years……….
 
A whole loan is a type of MBS, but if you deal in bonds for a living and you say “MBS” you’re talking about FN, FH, or GN product. Whole loans are private label MBS sold by any number of underwriters from Countrywide to Wells Fargo or any of the others.
There is a big difference between private label whole loans and agency paper. The agency paper is backed by Fannie, Freddie, or Ginnie…whole loans are not.
Whole loans are loans that are non-conforming, meaning they don’t meet one or more standards to be included in an agency wrapper. It could be any of a number of things from the size of the loan to the documentation required to get the loan, etc.
At any rate, whole loans carry more risk, therefore trade at wider spreads than agency MBS.
So while it’s true that whole loans are a type of MBS, they are always distinguished when being shown to a customer as a “whole loan” or a “whole loan MBS”.
Generally a whole loan will have a ticker like “CSMS 2007-1 2A1” and an agency will be “FN 888797”.
I’ve generalized a lot here to keep things simple. Hope it helps.
 
Thank you, Greenspan. It helps a lot.
After reading a couple more chapters and about the UK MBS, I realized that they are backed by the full faith of the US government.
 
“After reading a couple more chapters and about the UK MBS, I realized that they are backed by the full faith of the US government.”
Even US MBS are not backed by the full faith of the US Government, so I’d keep on reading if I was you.
 
Right, not all of them are. Thanks.
 
Honestly, you guys are confusing me with your use of the word “MBS” (from someone who trades mortgage backed securities for a living), so let me try to clear this up.
“but if you deal in bonds for a living and you say “MBS” you’re talking about FN, FH, or GN product.”
From someone who deals in bonds for a living, this is patently false. FN, FH, and GN are called “agencies” in “trader-speak” (as Joey alluded to); anything else (such as CWL, JPMAC, etc.) is simply called MBS, or, to be more specific in the case of mortgages, RMBS (the “R” standing for “residential”, not to be confused with “CMBS” - “commercial”).
As long as I’m being a stickler for proper terminology, I’ll tackle this one as well…..
“Whole loans are private label MBS sold by any number of underwriters from Countrywide to Wells Fargo or any of the others.”
I guess that you could argue that this is true in theory, but the way you state it is misleading for “real-life”. Whole loans are the building blocks for a MBS - a whole loan sale from an originator like Wells or Country to an issuer (generally the Street before they all decided to buy their own originators) will generally be on the magnitude of $5B to $10B, which the issuer will then break down into 5 or 10 individual securitized mortgage-backed securities. If my coverage called me up and told me that they were selling whole loans there would be a blank stare on my face and I’d ask them if they had any actual bonds to sell me.
“they are always distinguished when being shown to a customer as a “whole loan” or a “whole loan MBS”.
Again, never heard it; although there might be somewhere on the Internet which says that this usage is correct, in the real world you’d be looked at like you had five heads (not two, three, or even four). An MBS is assumed to be made up of “whole loans”, unless it’s an agency bond, in which case all the loans are conforming (full doc, prime FICO, not larger than $417K or whatever the hell the ceiling is now).
As a sanity check I just did an advanced find on “whole loan” in my Outlook folder where all my coverage’s emails get sent to - out of ~14,000 emails there were 18 that contained the phrase “whole loan”.
I was going to let all of this stuff slide as I was too lazy to correct Greenspan’s initial post, but since this thread is actually getting responded to and people are reading it I felt that it was my duty to correct any errors so that all of you wouldn’t sound retarded if you ever tried to talk to a mortgage trader about anything that you’ve read here.
I’m like Jesus in that way.
 
Wow. After reading “MBS” you’re talking about FN, FH, or GN product.” my spidey sense started tingling.
 
When I first saw that post I actually had a reply typed out that said “80% of the above is incorrect”, but didn’t feel like pointing out what was and wasn’t correct.
After some more thought I realized that I would be doing the esteemed members of the Analyst Forum community a disservice by remaining apathetic on the matter.
 
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