Ginnie Mae's woes are far from over.
In the midst of trying to figure out how to best modify its mortgage-backed securities pools in order to make the government sponsored enterprise more competitive, a second Bond Market Association meeting held last week seemed to produce a slightly more positive response from the investor-dealer community - although a consensus has still not been reached.
Ginnie has proposed widening its range of coupons in Ginnie I pools. However, MBS players who have large positions in Ginnie Mae bonds feel that this could cause a disruption in the market, and therefore lead to great losses.
More than 60 people, including investors, dealers, mortgage bankers and Ginnie Mae officials participated in a conference call last week with the Bond Market Association to change Ginnie pooling rules.
According to one participant, no consensus developed, but overall the reception to Ginnie's proposed direction of allowing some odd coupon Federal Housing Administration/Veterans Administration loans into Ginnie I pools was less negative than at the previous Bond Market Association meeting.
"The investor community - whose opinions ultimately matter the most - was split, with some of the largest Ginnie Mae investors strongly opposed to any change," the participant said. "But some others were willing to consider rules that would allow odd-coupon loans into Ginnie I pools without raising the option cost of those pools much."
Ginnie Mae has suffered a loss of business and market share recently, partly because the Federal Home Loan Banks are buying more of the loans that Ginnie otherwise would securitize. The GSE recently proposed expanding the mortgage coupons eligible to be included in its Ginnie I pools, reducing the range of coupons in its Ginnie II pools, and advancing the Ginnie II delivery date by five days.
At last week's conference call, the specific Ginnie Mae proposal to allow coupons from 50 to 75 basis points above the passthrough rate, with a maximum weighted average coupon at issuance 62.5 basis points above the passthrough rate, did not get much support.
"If you are going to let odd coupons into Ginnie I pools, let them all in," said a participant, "so that you abolish the Ginnie II program, not just scale it back."
A counterproposal was to put all coupons from 37.5 to 75 basis points above the passthrough rate into Ginnie I pools, but to require the weighted average coupon at issuance to be in a tighter range, such as 45 to 55 basis points above the passthrough rate.
"This would not significantly increase option cost," the source said.
An investor noted that no one pays up in the conventional market to get all the loan rates exactly the same, but they do pay up to get a low weighted average coupon on current coupons and premiums.
According to the Bond Market Association's research, changes to Ginnie I pools will cause new securities to have a lower price of 3/32 to 4/32 versus existing pools.
Additionally, it was clear from the conference call that the mortgage banker community is quite passionate about the cheap levels at which Ginnie II's trade, and the corresponding harm to them and their mortgagors. They argue that in the absence of any change, even more FHA business will migrate to the FHLBs.
Already, there has been talk that one of Countrywide Home Loans Inc.'s insurance units has joined the FHLB system (insurance companies are allowed to join FHLBs, as are banks, thrifts and credit unions) and that the company is just beginning to use the FHLB-Chicago's Mortgage Partnership Finance program.
Countrywide is apparently looking at using the MPF program to fund Ginnie Mae product (Countrywide is the third largest servicer of GNMA loans).
Even as more business is taken away from Ginnie Mae, the conference call made it clear that if any change is to be made, the suggested effective date is Jan. 1, 2001. That provides lead time and a clean "vintage effect;" for instance, every 2000 and earlier production pool would be old style, while every 2001 and later pool would be new style.
"If such a change is to work, Ginnie Mae must get their systems up to the Fannie Mae/Freddie Mac standard," said a market participant. "In particular, accurate weighted average coupons would have to be produced monthly, no later than the "B" tape release date.
