The new FHASecure program, which was first announced in late August, is now being discussed widely in the MBS market.
Countrywide Securities analysts, in their most recent report, talked about the options available for securitizing these loans. One option, they said, would be to securitize these mortgages as part of GNMA II jumbo issuance, with limits on the amount of FHAS loans that is included in these pools. This is similar to the 10% limit on builder buydown loans currently allowed in jumbo pools. The second alternative is to securitize them as custom pools, which would then be quoted and traded separately.
Countrywide Securities cited the comments made in the two recent conference calls hosted by the Mortgage Bankers Association (MBA) and Securities Industry and Financial Markets Association (SIFMA).
Countrywide said the MBA call indicated that most members expected production resulting from the initiative to be moderate and, for some lenders, quite small. The MBA's membership appeared to be split evenly on whether FHAS loans should be comingled with FHA production in GNMA II pools, or whether they should be traded separately as GNMA IIIs. During the call, lenders favoring a separate program expressed concerns that Ginnie Mae pricing might be hurt by the inclusion of the FHAS loans in jumbo pools. This inclusion will most likely affect the execution of their growing volumes in generic FHA products.
In the SIFMA call, the participants were unanimous in their view that the loans be securtized as custom pools. This would be based on expectations for large-scale production, as well as unfavorable attributes possibly affecting GNMA pool prepay performance. Some dealers expressed the belief that incremental issuance could be as much as $1 billion monthly, the analysts reported. Countrywide said that at these levels, GNMA II pool composition would be considerably changed, at least as long as the FHAS program stays effective. As GNMA II fixed-rate issuance was roughly $5.6 billion in August, monthly issuance of $1 billion would be equivalent to 18% of production. In addition, dealers as well as the investors SIFMA canvassed thought that the FHAS will be considerably more likely than generic FHA loans to become seriously delinquent (i.e., 120 days or more), making them eligible to be bought out of GNMA pools by originators. A greater propensity to be bought out would result in faster prepays when the pools are trading at high dollar prices, which in turn would weigh on the pricing of premium GNMA pools containing the FHAS loans.
According to Countrywide, the recent weakness in GNMA/FNMA swaps was attributed to the impact of, as well as the uncertainty resulting from, the FHAS program on Ginnie issuance and production. Undoubtedly, analysts said, GNMAs have performed poorly since the end of last month. Data the firm presented indicated that swap levels for both Ginnie Is and IIs relative to FNMAs dropped significantly early in September, which coincided with the point that details of the FHAS initiative were made public.
But Ginnie Mae pricing was weighed down by a number of factors, Countrywide said, both related and unrelated to the FHAS program. The prospect of an added $1 billion in monthly supply, to a market that has only recently seen monthly issuance rise to around $9 billion, most definitely will affect pricing. Moreover, Countrywide noted that Ginnie Mae recently removed the maximum size of Department of Veterans Affairs loans allowed in GNMA pools. This is expected to result in more issues. Countrywide said that VA loans already make up about a quarter of the loans in Ginnie Mae issuance and roughly one-third of GNMA production by dollar volume. Thus, larger loan sizes for a significant part of the population might result in greater refinancing sensitivity. Countrywide also said that legislation that passed the House (but faces an uncertain future in the Senate) has a number of provisions that would affect the market. This is most apparent, Countrywide said, in a proposal to increase the Federal Housing Authority maximum loan limit to 125% of the current limit, which is equivalent to $362,790 for loans originated in 2007.
Countrywide noted that both investors and dealers at the SIFMA call were concerned that FHAS-based loans would potentially become seriously delinquent and thus be candidates for servicer buyouts. Higher buyout rates would increase speeds on premium GNMA pools, resulting in greater negative convexity. Thus, analysts said that the prospect of higher buyout-related prepays is an important factor driving the calls for segregating these loans into a custom program. To address such concerns, a two-year moratorium on servicer buyouts has been floated - to generally poor reviews by lenders. Countrywide said that an alternative might be to extend the minimum period for buyout eligibility beyond 120 days.
But analysts at the firm didn't think that loans made under the FHAS would exhibit significantly different performance compared with generic FHA loans. Because borrowers need a clean credit history for six months before the reset, they would be at least equal in credit to the rest of the FHA population, Countrywide analysts argued. This population's overall credit performance is still weak, and buyouts have continued to hurt premium GNMA prepayment speeds. It is possible that the credit performance of loans originated via the FHAS may in fact be less likely to become delinquent. Analysts noted that by the program's definition, the subprime loans being refinanced only became delinquent after the reset of the loan, resulting from the spike in the loan's rate and required payment. Nevertheless, Countrywide analysts expect FHAS loans to be securitized as custom pools. But opposition that dealers and investors showed in the SIFMA call to commingling the loans in jumbo pools was "overwhelming," Countrywide said.
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