Ginnie Mae recently released additional disclosure items such as buyout information, buydown percentages and delinquency data. The new data, which is one month lagged, was as of the Nov. 1 factor date and reflects prepayments occurring in October.
The buyout data gained importance with the high October buyout activity. The month saw seriously delinquent loans being bought out rather than foreclosed, according to David Montano, head of mortgage research at JPMorgan Securities. Meanwhile, overall prepayments caused by direct foreclosure were negligible.
Art Frank, head of mortgage research at Nomura Securities, said that servicer buyouts only partially explain the faster speeds on GNMA securities, adding that this is more applicable to seasoned premium GNMAs, rather than lower coupon or more recent production. Frank noted that for 2002 and earlier vintage GNMAs, buyouts are permitted with just a single missed payment, while it takes three missed payments for 2003 and newer collateral. Furthermore, Frank said that newer production and lower coupon 4.5s through 6s comprise the bulk of outstanding GNMAs, noting that there is not much of an incentive to buyout GNMA 6s at this point because they are not trading at much of a premium. There are two more important reasons for comparatively faster GNMA speeds: the increasingly subprime nature of the GNMA borrower and these borrowers' desire to eliminate their mortgage insurance premiums by refinancing into a conventional loan.
Citigroup Global Markets analysts confirm that buyouts are the primary contributors to comparatively faster premium GNMA speeds, noting that buyouts account for roughly five to 10 CPR for premium coupons. Citigroup analysts also noted the high buyout rate for 2004 and 2005 vintages. By contrast, there are little, if any, buyouts in discounts, analysts said
JPMorgan's Montano said that buyouts contributed merely one CPR to GNMA 5s, providing further evidence that buyouts are not a significant contributor to discount speeds. Furthermore, without buyouts and delinquencies, Montano said that GNMA discounts prepaid by roughly five to six CPR faster compared to prime conventionals. Instead of buyouts, Montano attributes the faster discount speeds to demographic factors and the housing market.
"In a higher rate and softer housing environment, we expect that GNMA discounts should continue to prepay faster than prime conventionals due to the high LTV borrower base and high delinquency rates," Montano said.
Going forward, credit would be playing a more important role in discount GNMA speeds as delinquencies and defaults would probably increase with the Federal Open Market Committee still raising rates and as the housing market slows. Even though Ginnie Mae does not provide FICO data, Montano thinks that in recent years the credit profile of GNMA borrowers has worsened because of competition from both the subprime mortgage sector as well as the GSEs. For instance, a typical 90 or greater LTV FNMA pool has a 685 FICO (720 for all FNMA 30s). By contrast, GNMA credit scores could be in the 500s to low 600s.
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