Why are loans with LTVs above 105 percent not permitted to be commingled in standard Fannie Mae TBA-eligible MBS pools?
Permitting loans with LTVs greater than 105 percent in TBA (to-be-announced) securities would have tax reporting implications for investors that are subject to certain income and asset tests for federal income tax purposes (e.g., REITs must derive at least 75% of their income from real estate assets). Right now, 100 percent of Fannie Mae’s TBA MBS qualify as real estate assets, and thus there is no need for additional tax reporting. In addition, the introduction of LTVs in excess of 105 percent could create greater uncertainty around prepayment speeds for TBA pools since there is no significant track record of data on prepayment of loans with LTVs above 105 percent. Finally, the MI flexibility offered under the Home Affordable Refinance Program is temporary and scheduled to expire in mid-2010. Many loans with LTVs above 105 percent are reliant on the HARP MI flexibility, so introducing LTVs of 105.01 to 125 percent into TBA pools could produce an anomaly in prepayment expectations for
