Last week Ginnie Mae issued a clarification of its buyout authorization for issuers of Ginnie pools that contain loans affected by severe storms and hurricanes. This is in response to investors having questions and concerns about the impact of this buyout provision on prepayments in the sector.

"We issued a clarification on the language pertaining to buyouts as it raised some fears among investors that this would cause a dramatic increase in buyout activity," said Michael Frenz, senior vice president of capital markets at Ginnie. He added that the universe of potential loan buyouts is much smaller as Ginnie Mae will use its discretion to determine the eligibility of a loan on a case-by-case basis.

On Sept. 8, Ginnie issued the first memorandum on buyouts. The All Participant Memoranda (APM) -04-12 states, "Ginnie Mae is authorizing issuers of Ginnie Mae pools containing loans on properties damaged by the severe storms and hurricanes, to buy the loans out of the pools for the remaining principal balance of each loan." The Agency added that the loans do not have to be delinquent before they can be repurchased.

The purpose of this authority is to assist lenders in keeping borrowers in their homes, by facilitating loss mitigation, the announcement also said.

As a clarification, the second memorandum, APM-04-15, de-scribed the loans that are covered by this buyout provision. "This APM makes it clear that very few loans will be allowed to be bought out on properties damaged by the recent hurricanes," said Art Frank, head of mortgage research at Nomura Securities. The clarification became necessary as investors and other market participants raised concerns about the effect of this move on prepayment speeds in the sector. Frank said last Wednesday, after word spread that the authorization would add to premium GNMA speeds, the GNMA/FNMA 5.5s swap was off by a tick.

The clarification stated that only servicers that have at least 5% of their entire GNMA servicing portfolio in the disaster areas designated by the President would be allowed to perform a buyout. Furthermore, issuers must give evidence of the damage to properties that Ginnie Mae will determine as acceptable. Frank said that Ginnie Mae is concerned about small servicers who may not have the capacity to advance principal and interest on non-performing loans on damaged properties. He added that large GNMA servicers probably would not qualify under the 5% rule.

Effect on prepayments

Frank doubts that the impact of buyouts on overall GNMA speeds will go over 0.1 CPR. He explained that servicers do not really have an incentive to buy out loans on badly damaged properties because the Street does not have a good bid for those loans. Furthermore, there are only a few small servicers whose business is concentrated in Florida, and perhaps Alabama and Louisiana, that are authorized to buy out loans on damaged properties that would otherwise not be eligible for buyout under the normal GNMA buyout rules.

He called the announcement a "nonevent" for the overall prepayment speeds of GNMA pools, "although some small all-Florida pools might see a handful of extra loans prepay and be a bit faster for a month or two," he stated.

In a report written before the clarification was released on Thursday, Lehman Brothers said that in the worst-case scenario, the impact of buyouts on six-months speeds will be no more than 2% to 3% CPR. However, analysts added that if these buyouts were to occur in the next three months, the impact would be 5% CPR faster.

In the median case, Lehman assumed that the securitized conforming market will not go over two-thirds of the total outstanding mortgage universe. This suggests that at least one-third of the homes affected were not securitized, not conforming or both. Under this situation, the prepayment impact on GNMA securities is roughly two-thirds of the worst-case scenario.

Under the best-case scenario, with GNMA pools constituting only about 7% of the total $6 trillion outstanding for the total mortgage universe, Lehman pegged the prepayment impact at 1% CPR over the next six months or approximately 1% to 2% CPR if the buyouts happen over a three month period.

Lehman also noted that the proportion of total GNMA outstanding in Florida, Indiana, South Carolina and Virginia is roughly 15% to 17% across coupon cohorts. Analysts said that the key is to estimate the proportion of the GNMA homes that were damaged by the hurricanes. Some reports suggest damage in roughly 100,000 homes located in Florida. Analysts used this figure, as well as the number of outstanding GNMA loans in the affected states, to predict the prepayment impact of the buyouts under all three scenarios mentioned above.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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