Comments on: Fannie Mae DUS – The other side of the transaction. http://mfloan.net/2011/08/06/fannie-mae-dus-the-other-side-of-the-transaction/ Your Multi-Family Finance Connection Sun, 29 Apr 2012 18:06:42 +0000 hourly 1 http://wordpress.org/?v=3.0.4 By: Asher Rapp http://mfloan.net/2011/08/06/fannie-mae-dus-the-other-side-of-the-transaction/#comment-103 Asher Rapp Thu, 31 Mar 2011 16:15:08 +0000 http://mfloan.net/?p=1687#comment-103 One of the reasons they look cheep is due the structure. On a dollar value, you really don't compare them to traditional agency mbs pass-thru securities. Due to the prepayment premiums/penalties and longer amortization of principal payments on shorter finals, the bonds compare more closely to balloon structures and agency bullet structures..hence the spread to the US swaps curve vs the standard interpolated treasury curve. The market can swing based on supply/demand issues, but general 5-7yrs are currently trading around 40 to 60bps above the swaps curve with is roughly the same spread to agency bullets. Unlike agency debentures, you still receive monthly payments of MOSTLY interest and less principal. After the initial yield maintenance period these borrowers in most cases tend to refinance the deal, especially in lower interest rate environments. If its financially feasible they could choose a faster amortization of principal in the form of early prepayments of principal. However, that is usually not the case due to the STIFF points of premium prepay penalties...which by the way pass thru to the holder of the securities. If anything, I believe they offer a more stable cash flow than traditional residential single family mortgages. If one invests in high grade AAA or double AA corporate credits and or agency debentures, FNMA DUS bonds offer a significant spread with the same AAA rating and pledging as other agency securities. One of the reasons they look cheep is due the structure. On a dollar value, you really don’t compare them to traditional agency mbs pass-thru securities. Due to the prepayment premiums/penalties and longer amortization of principal payments on shorter finals, the bonds compare more closely to balloon structures and agency bullet structures..hence the spread to the US swaps curve vs the standard interpolated treasury curve. The market can swing based on supply/demand issues, but general 5-7yrs are currently trading around 40 to 60bps above the swaps curve with is roughly the same spread to agency bullets.

Unlike agency debentures, you still receive monthly payments of MOSTLY interest and less principal. After the initial yield maintenance period these borrowers in most cases tend to refinance the deal, especially in lower interest rate environments. If its financially feasible they could choose a faster amortization of principal in the form of early prepayments of principal. However, that is usually not the case due to the STIFF points of premium prepay penalties…which by the way pass thru to the holder of the securities.

If anything, I believe they offer a more stable cash flow than traditional residential single family mortgages. If one invests in high grade AAA or double AA corporate credits and or agency debentures, FNMA DUS bonds offer a significant spread with the same AAA rating and pledging as other agency securities.

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