With the Federal Home Loan Bank (FHLB) of Chicago's recent announcement of impressive gains in the Mortgage Partnership Finance (MPF) program, some fingers are pointing to this factor as the primary reason for the current dearth of Ginnie Mae supply. However, other mortgage analysts say that the lack of issuance from this sector is typically the result of a refinancing wave that occurs in a strong housing market.

The meager GNMA supply levels are especially apparent when compared to issuance in conventional mortgages. Despite the steep rise in the issuance of conventional mortgages seen over the past several months - 30-year conventionals have averaged roughly $20 billion in monthly net issuance - GNMA supply has remained negligible, according to a recent report by Lehman Brothers. In fact the total outstanding in GNMAs has gone down during the past year, the report stated.

However, Lehman said this is no surprise considering that GNMA borrowers usually switch to conventionals during refinancing waves to avoid paying the annual mortgage insurance premium, which is an additional 50 basis points to their mortgage payments.

Analysts also noted that the proportion of GNMA IIs has gone up considerably in the past several months. They noted that this has greatly improved the liquidity of the sector.

Increasing FHLB

FHA/VA purchases

Another factor in this decline is the ramping up of the FHLB sector. In a recent release, FHLB of Chicago announced that the total MPF outstanding loans was up to $30.6 billion at the end of the second quarter (47% annualized growth rate), increasing $5.8 billion from 2001 year-end. Of the MPF loans funded in 2002, two-thirds were conventional mortgages, while one-third consisted of FHA/VA loans.

This would mean that the MPF program (consisting of nine FHLB banks administered by FHLB Chicago) has taken out roughly $1.9 billion in FHA/VA product from the GNMA securities market, according to a UBS Warburg report released last week.

Aside from this, UBS said the Mortgage Purchase Program (MPP), which consists of Cincinnati, Indianapolis and Seattle FHLBs, grew by $7 billion in the first half of the year. With one-third of that increase attributed to FHA/VA mortgages, this would mean another $2.3 billion of potential GNMA securities has been taken away from the market before securitization.

In addition, the competition for GNMA securities is heating up. The Federal Housing Finance Board (FHFB), which regulates the FHLBs, lifted in June the restriction on FHLBs limiting their holdings of government-guaranteed mortgage loans to not more than one-third of their total purchases. Thus there would no longer be any incentive to limit MPF's and MPP's buying of FHA/VA mortgages

Keeping the spirits

of the program

However, representatives from FHLB Chicago told ASR that they intend to keep the original intent of the MPF program to compete against Freddie Mac and Fannie Mae for conventional conforming fixed-rate mortgages.

The representatives said there might be short-term incentives to buy more or less FHA/VA mortgages as the market moves and different opportunities arise, but for the most part, they expect that the program's usual purchase percentages - two-thirds in conventional mortgages and one-third in FHA/VA loans - would be kept going forward.

UBS stated that a number of FHLBanks have said that while they could now buy more government-guaranteed loans, they would probably not do so because this would go against the spirit of the MPF and MPP programs.

Analysts noted, however, that they expect the percentage of FHLB holdings of these types of loans to go up, considering the ease of processing government-insured assets

Despite the considerable increase in FHLB buying of FHA/VA loans, some analysts still maintain that this is not a major factor in the lack of GNMA supply. They said the purchases by the MPF program are still too small to have any real impact on GNMA issuance levels.

Consequences of

the GNMA dearth

The UBS report also posed the question of whether the lack of supply in the GNMA market, specifically in GNMA IIs, could cause a squeeze.

Analysts said that for this to occur, reduced supply has to be combined with robust demand, which has been happening with CMO machines gobbling up GNMA collateral.

They said that a squeeze is probably on the horizon, considering that over $4.4 billion of FHA/VA production has been taken out from the market (probably half of which is in 6s) and given that only $19.1 billion in GNMA II 6s is available - roughly $5 billion of which are in June and July CMO deals that are expected to close soon or are in the process of closing.

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