After languishing late last year, it appears that origination volume of Ginnie Mae adjustable-rate mortgages is staging a comeback.

A reliable leading indicator comes from the Government ARM index of Mortgage Bankers Association, which has been steadily climbing since late in the first quarter and then took a big jump for the week ending June 4, the most recent data available.

The index, after starting the year at an anemic average of 117.3, climbed to 223.8 by April 2 and to 276.5 by May 7. From there, it soared to 401.6 for the week ending June 4, according to the figures from the MBA.

Steve Banerjee, a mortgage analyst at Prudential Securities Inc., said July and August production will reflect the rising tide of Ginnie Mae ARM applications, adding that production should rise to $1 billion a month. Salomon Smith Barney Inc. analyst Lakhbir Hayre came to a similar conclusion, predicting monthly volume of $800 million or more over the next two months, and rising to $1 billion or more by August.

One reason for the jump in volume is the rise in long-term interest rates since February, which, to varying degrees, benefit ARM products because they are pegged to a lower point on the yield curve than 30-year fixed-rate mortgages. "The spread between the 30-year fixed mortgage rate and the ARM rate has increased from around 112 basis points in February 1999 to 171 basis points" as of June 18, Banerjee said.

Hayre predicted that while volume will likely taper off this fall after the peak home-buying season, next spring's volume could return to $2 billion. This level has not been seen since the program was forced to shut down during the summer of 1998 after reaching its legal volume cap.

"From a liquidity point of view, the increased volume is good for Ginnie Mae ARM value in general," Banerjee said.

According to PaineWebber Inc., "There has been considerable supply of TBA Ginnie Mae ARMs, particularly the 5 and 5.5 coupons, which cheapened this product to attractive levels."

As prices and liquidity pick up for the Ginnie Mae ARMs, this translates into lower prices on Main Street for this mortgage product. - ES

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