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Speed Watch: Freddie Mac's New Schedule Will Benefit Servicers.(Brief Article)
Servicers and Freddie Mac will be the biggest winners as a result of Freddie Mac's prepayment accounting cycle change that took effect July 1, according to Bear Stearns.
As reported in the last issue of MSN, the change will bring the midmonth to midmonth accounting cycle for prepayments on Freddie Mac MBS into alignment with Fannie Mae's calendar-month cycle.
As a result, investors in Freddie's Gold and ARM participation certificates were scheduled to receive an adjusted payment on July 15 that covered prepayments received during the 45-day period from May 16 through June 30.
In a recent report on the impact of the accounting cycle change, Bear Stearns analysts said it will produce a "substantial transfer of wealth" from holders of interest-only securities to holders of principal- only securities because of the loss of two weeks' interest on the principal prepayment in the second half of the month.
That means servicers will benefit because they are "by far the biggest holders" of Freddie Mac structured POs, the analysts said.
"Moreover, the one-time increase in the value of the PO comes at no expense to the valuation of the servicing IO stream since it is not a securitized (Freddie Mac) cash flow," they said.
As for Freddie Mac, it wins because it will be responsible for a full interest payment only in the month that a prepayment occurs, according to the Bear Stearns analysts.
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