The Edgar Pooling and Servicing Agreement, commonly known as PSA, is a legal document that outlines the terms and conditions for the securitization of mortgages. It is an important agreement that governs the relationship between the issuer of mortgage-backed securities and the investors who buy them.
In the PSA, the issuer transfers the ownership of a pool of mortgages to a trust, which then pools and divides them into different classes of mortgage-backed securities. These securities are then sold to investors, who receive payments based on the interest and principal payments made by the borrowers on the mortgages in the pool.
The PSA also sets out the responsibilities of the servicer, who is responsible for collecting the mortgage payments from the borrowers and distributing them to the investors. The servicer is also responsible for managing any delinquencies or defaults.
One of the most important aspects of the PSA is the allocation of cash flow to the different classes of securities. This is known as the “waterfall” structure, where cash flows from the underlying mortgages are directed through a hierarchy of payment priority to the different classes of securities.
The PSA also includes provisions for the replacement of mortgages in the pool if they default or become delinquent. This is known as a “substitution,” which allows the trustee to replace a defaulted mortgage with a new one that meets certain criteria.
Overall, the Edgar Pooling and Servicing Agreement is a crucial document in the securitization of mortgages. It provides a clear framework for the relationship between the issuer, the investors, and the servicer, and helps to ensure that all parties adhere to the agreed-upon terms and conditions. As such, it is an essential tool for managing risk and facilitating the smooth functioning of the mortgage-backed securities market.