Ginnie Mae's new multi-issuer pool type has received positive reviews since it was announced on Oct. 15, as the program appears to have tempered investor concerns that the new securitized loans would be a drag on the current programs.
The agency will create a separate pooling of FHASecure loans within the Ginnie Mae II program, effective Dec. 1. FHASecure is the policy launched in August by President George Bush that refinances delinquent adjustable-rate mortgages into FHA-insured loans when they become delinquent due to a rate reset. It also refinances fixed-rate conventional loans with subordinated second liens in FHA-insured products.
Bond traders and investors had expressed concern that lumping loans with potentially higher delinquency rates into the current securities pool would negatively affect the quality of Ginnie I and Ginnie II TBA loans, leading to faster prepayments. Some had called for the launch of a Ginnie III non-deliverable TBA pool for the FHASecure securities.
The Securities Industry and Financial Markets Association (SIFMA) released a statement last week calling on Ginnie Mae to create a separate program for the FHASecure loans because "these constitute a different product, with potentially different levels of required analysis by investors, from traditional FHA loans securitized in the Ginnie Mae I and II programs."
Despite the agency's decision not to create a third securitized pool, its plan to segregate the new loans within Ginnie Mae II seems to be enough to alleviate investor concerns for now. "It doesn't matter, so to speak, what you call it, whether it's Ginnie III or Ginnie II, as long as you can tell one group from the other," said Brian Ye, an MBS analyst at JP Morgan Securities. "Our view is that in the immediate future, it should be good for the I and II loans simply because they are pooling them separately in a different pocket."
Chris Killian, manager of the MBS and securitized products division for SIFMA, agreed. "Our goal was to support the FHASecure initiative that was announced in August, but at the same time be careful there wasn't any sort of unintended consequences to the Ginnie I and Ginnie II programs," he said. "This isn't a Ginnie III, but you still know what it is when you see it. In the end, it kind of serves the same purpose."
Ginnie Mae held meetings over the past month with SIFMA and a group of Wall Street investors in response to growing concerns about how the agency would securitize the FHASecure loans. "The meetings with all our industry partners were critical to the decision," said Steve Ledbetter, senior adviser at Ginnie Mae. "We don't make these decisions in a vacuum. I think at the end of the day, we were part of a deliberate and well-thought-out process, so I don't think there were any surprises.
After meeting with the concerned investors, Ginnie Mae ultimately stood by its decision not to launch a Ginnie III. "I don't think we thought that was necessary because of the nature of the program," said Ledbetter. "And frankly, the Ginnie II is a really well known product, and it's increasingly well regarded. About 60% of our fixed-rate production is in Ginnie II now."
Ginnie Mae is the only issuer of mortgage-backed securities guaranteed by the U.S. government. Even though its bonds make up only about 10% of the $4 trillion market for guaranteed mortgage securities, some investors nonetheless have a lot at stake. "I think the concerns were strongest among investors who are sitting on a lot of these securities," said Killian. "I think the basic concern is that it's a new product and you don't know how it's going to perform. The unknown is a big thing with this, because it is different, it is a change."
Because loans in the multi-issuer pool will not be TBA-eligible, analysts are forecasting them to trade more cheaply than Ginnie Mae I and II. "This reflects the fact that these pools will be less liquid, and the underlying loans are expected to show higher delinquencies and defaults than the traditional FHA product," wrote UBS analysts.
At least one market observer thinks the biggest help to the subprime market soap opera will come not from this new loan pool initiative but from lifting the portfolio caps for Freddie Mac and Fannie Mae. While he acknowledged that the FHASecure program will help borrowers "to a certain extent" by refinancing from a subprime loan with a higher teaser rate than the FHA rate, he argued that it will be a small program with limited reach.
"Someone early in the process called it much ado about nothing,' and to a certain extent it really is," he said. "I still think the ultimate solution to the subprime problem is going to be with the GSEs, partly because they can't be held up by this whole issue of whether or not it's deliverable. They can just put it in portfolios and hold it in loan form."
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