With recent Ginnie Mae prepayment speeds considered to be slow (as compared to conventional production), Street analysts are looking at what is causing Ginnie's snail pace.

Some sources have pointed to the fact that the continued evolution of the mortgage market, which involves the further streamlining of the refinancing process, has caused conventional production to outpace GNMAs.

GNMAs, which are regulated by the government, are not governed by the competition that is currently occurring in the private mortgage sector. With more competition not only amongst lenders but also between the two agencies for market share, there is a greater thrust towards better pricing, more advanced technology and faster loan processing, all with the aim to make refinancing easier and cheaper for the borrower.

Though the drive for market share is apparent on the government side as well, analysts say that competition on the FHA/VA side is not as fierce. Furthermore, the FHA does not have alliance partners the way Fannie Mae and Freddie Mac do so the aspect of pressuring from the lenders' side is absent. In addition, the FHA is really a government agency and therefore regulators rather than pure market forces set many of its guidelines. Aside from this, anecdotal evidence suggests that mortgage brokers clearly think that FHAs are a lot harder to refinance than conventional loans.

Therefore, the continuing evolution in refinancing efficiency proceeds more swiftly on the conventional side compared to the government side.

Consolidation

With the consolidation in the mortgage industry, there is a smaller number of servicers that control a very large part of the market, and this gives large lenders leverage with both Fannie and Freddie. Both agencies have alliance partnerships, for instance Fannie's alliance with Washington Mutual and Freddie's partnership with Wells Fargo. Both of these lenders are considerably huge, and so they demand a significant market share of all Fannie and Freddie mortgages. Because of this, it becomes fairly apparent that these larger lenders would have a better negotiating position than a small issuer who only puts out $5 billion worth of loans in a year.

According to MBS analysts, there is anecdotal evidence that these lenders can make Freddie and Fannie tailor their guidelines to what these companies want and need. Obviously, these partners can negotiate for fees and pricing as well for an exact description of what the agency product would be like. For example, streamlined refinances are one particular product that must follow certain guidelines required by the agencies.

Two factors driving slow GNMA speeds

In a recent UBS Warburg report, analysts said that the recent slowdown in GNMA speeds was caused by two factors. The first is that most FHA borrowers who experienced significant home price appreciation already refinanced their loans in early 2001, leaving out those with too little cash and equity to switch to a conventional refi.

The second one is that because of industry capacity constraints, originators were more concentrated on conventional loans, often at the expense of FHA/VA loans.

Mortgage bankers focused on conventional loans as opposed to focusing on processing FHA-to-FHA refinancing, which "is much more time consuming, much more energetic in terms of resources; basically it's better allocation of their time to do conventionals," said Glenn Boyd, an associate director from the mortgage strategy group at UBS.

The report stated that with the lifting of capacity constraints, GNMA refinancing thresholds should return to their historical pattern. This would mean that GNMA S-curves will revert to being 15-20 basis points less efficient than FNMA, compared to the 40-basis-point differential seen last December.

UBS said that advances in processing conventional loans would have a more interesting long-term effect. With competition in the private mortgage sector driving further advances in the refinancing process, originators are expected to start programs to make refis on seasoned products more streamlined.

"If the next refi wave hits in two to three years, FHA-to-FHA refis on both new and seasoned product will be characterized by higher refi thresholds and slower top speeds, compared to conventionals," wrote Boyd in the report.

Ginnie Mae borrowers

affected by the recession

Other analysts have said that the recent GNMA slowdown was caused by the fact that GNMA borrowers were more affected by the recession than conventional borrowers. Some analysts pointed to the fact that FHA delinquencies increased significantly over the past year,

"GNMA borrowers were affected in the context that great rates were available and yet they haven't been able to participate," said Mahesh Swaminathan, an analyst from Merrill Lynch. "To some extent the relatively lower amount of equity that GNMA borrowers accumulated as compared to conventional borrowers contributes to the slowdown but I don't think that in itself is a complete explanation. I think the best way to explain the slowdown is that given that Ginnie borrowers tend to be concentrated in certain sectors, notably manufacturing, they were more affected by recession than conventional borrowers were."

Meanwhile, Merrill said that GNMA prepayment speeds will decline to 20% to 25% in the upcoming prepayments reports that would reflect January refinancing activity. On the other hand, the report stated that January prepayments would likeky be 30% below December levels for major conventional cohorts. Speeds on seasoned cohorts are expected to decline less than new pools.

Analysts said that while it is true that GNMA speeds were slower in December, the difference may diminish as conventional prepayments come off their highs.

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