After the Department of Housing and Urban Development recently allowed the Federal Housing Administration to insure 5/1 hybrid ARM loans with a 2% initial and periodic cap and a 6% lifetime cap (see ASR 4/4/05), Ginnie Mae followed up with an announcement that issuers will now be able to securitize this new product effective May 1. However, the Department of Veterans Affairs has not yet announced a similar program as of yet.

In recent commentary, Merrill Lynch noted that the current GNMA 5/1 program with 1/1/5 cap, along with the Agency's 3/1 program, have been ongoing since fall 2003. However, gross issuance in the 5/1 program has averaged under $20 million over the last six months, with a $100 million total outstanding balance. Merrill analysts said that a reason for the relatively low issuance volume is "the capital market's lack of enthusiasm in buying loans with 1% cap five-years out." This is where the forward curve indicates the cap will probably be in the money, thus reducing the interest to the investor. "A 2% initial cap could spark more interest from the markets, making it easier for lenders to offer these loans to borrowers as they can always package and sell them to investors," Merrill analysts wrote.

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