Fannie Mae has simplified the way it classifies adjustable-rate mortgage securities, a move it hopes will make its loans more competitive.

Beginning this month, Fannie Mae, formally the Federal National Mortgage Association, has cut by more than 50% the number of its "subtypes" for securities backed by adjustable-rate loans. Subtypes are loans that can be secured together because they share certain crucial characteristics, such as the rate cap or the index to which the loan is tied.

By eliminating four of the characteristics, Fannie was able to cut the number of subtypes to 189, from 450.

"By standardizing our ARM mortgage-backed securities, 80% of outstanding Fannie Mae ARM securities are now contained within just 10 subtypes," said Gene Spencer, vice president for mortgage-backed security investor marketing.

This means that $13 billion of outstanding ARMS will be flooding into the largest 10 subtypes. As a result, it will be easier to form these loans into the largest type of pools. These very large pools trade better and ultimately serve to reduce the interest rate the borrower pays.

The subtype that will see the biggest gain in liquidity is one comprising loans tied to the 11th District Cost of Funds index, or COFI. About $7.5 billion of loans will now qualify for that subtype for the first time.

As a result, according to Fannie, lenders will see an improvement in the execution of new loans tied to COFI that may be sold to the secondary giant. This year, thrifts have been originating loans tied to COFI at rates that Fannie Mae and Freddie Mac, or the Federal Home Loan Mortgage Corp., have been unable to match.

While Fannie will no longer divide collateral according to the discontinued characteristics, that information will still be available to investors, Mr. Spencer said.

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