A relatively new development in the Ginnie Mae sector is the issuance of premium buydown pools in both the GNMA I and GNMA II programs, said Nomura Securities International’s head of mortgage research Art Frank in a press conference held today.
Frank said that prior to July 1, most FHA buydown loans were placed into generic GNMA II pools. In these buydown mortgages, the home seller , which is often the builder of a new development, pays 2% interest in the first year and 1% interest in the second year
However, with GNMA changing their pooling rules effective July 1, buydown loans were limited to a 10% maximum of the original principal balance of a new GNMA II pool. Because of this, some originators have started to create both GNMA I and II buydown pools. These securities now trade well below TBA prices despite the considerably slower prepays expected in the initial two years. This is the period when the seller of the home subsidizes the interest payments.
In GNMA 6s (I & II), buydown pools are now being offered at 14 ticks behind TBA; and in 6.5s, at 12 ticks below TBA. While these pools are not TBA-deliverable even after the buydown period expires, these sub-TBA prices make them very attractive for buy-and-hold investors, Frank said.
In an outlook piece Nomura recently published, Frank said that a newly-issued buydown pool of GNMA 6.5s prepays as if it were a GNMA 4.5s in year one and as if it were a GNMA5.5 in year two, since the mortgagor actually receives a 200 basis points subsidy in year one and a 100 basis points subsidy in the second year.
He explained that once the GNMA buydown market grows and receives more investor focus, it is doubtful that these large discounts from TBA prices will last. Frank suggests that non-dollar roll investors buy GNMA 6% and 6.5% buydown pools as an alternative to GNMA TBA 6s and 6.5s.