In a bold attempt to recapture business lost to the Federal Home Loan Banks' recent expansion of its Mortgage Partnership Finance (MPF) program, last week Ginnie Mae made public its proposal to broaden the loans eligible for its Program I mortgage-backed securities pools, a development that could profoundly change the competitive landscape of the MBS market.
Reactions from both dealers and investors have been extremely wide-ranging - running the gamut from predictions that the Ginnie I program will be utterly destroyed to voices of encouraging approval saying that such changes would be a healthy boost to GNMA liquidity and overall mortgage market competition.
At the behest of the Mortgage Banker's Association, Ginnie Mae requested that the Bond Market Association evaluate the market impact of possible changes to the GSE's two securitization programs. Though previous members of the BMA had looked down upon similar proposals in years past, the trade group made it clear that it was looking at the new proposal with a fresh set of eyes.
"We are not bound by previous views that previous members had," said a spokesman from the Bond Market Association. "There is no official position yet, but we want to be immediately responsive on this matter, though we can't commit to resolving all issues definitively."
The proposed changes encompass significant alterations of both the Ginnie I program, as well as the Ginnie II program. The BMA will have preliminary feedback for MBA constituents by the time of the upcoming MBA secondary market convention, which will be held in San Diego starting May 7.
The changes which Ginnie Mae has proposed are primarily aimed at preventing further losses of loans for the GSE - many of which have been picked up by the FHLBank's three-year-old, extremely well-executed MPF program. The MPF program is now allowed to absorb FHA-insured loans, and many market participants say that the program has an execution that is hard to beat.
In fact, that improved execution of FHA loans is something that all mortgage market players are inspecting with a keen eye recently.
Specifically, however, the recent expansion of the FHLBanks' MPF program has bitten into the business usually absorbed by the Ginnie II program, which accepts loans with mortgage rates higher than 50 basis points above a securitized pool. Loans that have "odd coupons," such as 7.75% or 8.25%, fall into the Ginnie II program. The problem is that Ginnie IIs trade at a concession to Ginnie I's, making them less attractive to borrowers, investors and lenders.
By strategically making more coupons acceptable for its Program I, however, Ginnie Mae hopes to increase the liquidity of its bonds and maintain the supply of its originators and MBS. This improved liquidity will certainly be beneficial for Ginnie Mae in that overall market liquidity will be helped.
"The reason that the FHLBanks' MPF program is as attractive as it is right now is that the high coupons generally must go into Ginnie II securities," said George Anderson, executive vice president of Ginnie Mae. "But Ginnie IIs don't price as well as Ginnie I's. So the MBA wanted us to consider putting the higher coupons into the Ginnie I pools, which would then theoretically price better. But the BMA will most likely tell us that by widening the weighted-average-coupon (WAC) dispersion on Ginnie Mae I's, that will worsen the pricings for Ginnie I's. So, we decided to try to make the pricings on Ginnie II's better."
In a letter written at the suggestion of an MBA task force, Ginnie has requested that the BMA consider and comment on the market impact of expanding Program I to include mortgages with coupons as much as 75 basis points more than coupon of the securitized pool.
Additionally, the GSE has also requested that the BMA comment on the impact of tightening the weighted-average-coupon dispersion in Ginnie II pools and on moving the delivery date from the 20th of the month to the 15th. Investors might construe these changes as making Ginnie II's more attractive, thereby causing them to price better as compared to Ginnie I's. Ginnie II's currently do not trade as well as Ginnie I's, and supply for both of the programs has steadily been dropping off more than that of FNMA and FHLMC bonds.
Ginnie II's represent approximately 40% of all Ginnie Mae issuance.
"We have received a formal request for consideration from Ginnie Mae of an odd-coupon pooling proposal, and we have circulated it to our relevant mortgage committees," said George Miller, deputy general counsel for the Bond Market Association. "We'll be meeting in the near future to discuss this internally with our members and take it from there. We will make every effort to get back to Ginnie Mae with some views and input before the MBA's annual meeting in early May."
"We do not have a portfolio as the other market players do; the GSEs, the MPF program - they all have a portfolio to aid them in handling programmatic changes like these," added Ginnie Mae's Anderson. "We don't have the authority or ability at this time. We need to be far more cautious and judicious in the changes we make."
Will MPF Strike Back?
As to whether the FHLBanks will have a counter-reaction to Ginnie Mae's competitive move, a spokesman for the Banks' regulators, the Federal Housing Finance Board, said, "Anything that creates competition in the mortgage market is a favorable development."
Another source closely tied to the FHLBanks program added that the MPF program has been successfully competitive to not only the Ginnie II program, but the Ginnie I program as well. "Ginnie's move is evidence that the MPF program is working as it was intended to, and that is fine with us, because we are in favor of competition."
The source pointed out, however, that the MPF program still has a distinct advantage because the seller does not pay a guarantee fee to sell the loan to the MPF program. "So you're saving six basis points right off the top, giving better execution," the source noted.
But Can MPF Compete
With Fannie And Freddie?
While many market players saw the proposal as positive - it increases liquidity and competition in the market - others were wary of the impact such changes would have on the Ginnie Mae market.
"It is ironic that now that Ginnie Maes have recently traded at an advantage, the market is moving to neutralize the force that enhanced its relative value," said Michael Youngblood, managing director of real estate at Banc of America Securities. "While this is undoubtedly a positive thing for increasing the supply of Ginnie Maes, it makes no sense to me that the Federal Home Loan Banks are almost being penalized, after the MPF program actually enhanced the relative value of Ginnies and helped to reduce the cost of FHA-insured loans to homeowners."
"I see it only as a small negative to the market," added Robert Calhoun co-director of research at fixed-income experts Tatersall Advisory Group. "Tighter WAC dispersions mean less prepayment volatility, so that may make Ginnie II's more appealing to investors."
Still, others insist that the MPF was not the first force to take business away from Ginnie Mae. Sources say that Ginnie lost a tremendous amount of business to Fannie last year because of the Fannie Mae I program. Ginnie Mae II's have been under competitive pressure for a long time.
Additionally, the FHLBanks raised the cap on the MPF program - but simultaneously put limits on the amounts of FHA loans that the branches could hold.
"One must remember that the FHLBanks may be successful in taking business away from Ginnie Mae, but it seems to me that they'll have a tough time competing with Fannie Mae and Freddie Mac," said an MBS expert. "They're going to find it difficult to meet that 66% target."
"Investors always detest uncertainty," added an MBS trader, "and it will hurt the Ginnie Mae market. Ginnie needs to address these issues - otherwise, it will continue to lose volume."
The volume in Ginnie issuance has been falling off more than Fannie or Freddie issuance for a long time, sources said, and these changes could further cause a drop-off in Ginnie Mae securitization.
"They are losing market share not only in the Ginnie II program but also in the Ginnie I program," the trader said.
"Plus, it is a competitive market," added Ginnie's Anderson. "Who knows what the MPF is going to do after we make our move. But I can't deal with that now. Let's make it better for now and see what happens."