With issuance in the Ginnie Mae sector declining noticeably, analysts are looking at factors aside from housing market fundamentals that may be taking Ginnie borrowers away from the sector.
"Evidence suggests that the private sector (as well as Fannie Mae and Freddie Mac) are taking market share away from Ginnie Mae," wrote Peter DiMartino, managing director at RBS Greenwich Capital. Ginnie Mae borrowers seem to be suitable candidates for the expanded underwriting standards currently offered by competing lenders.
Clearly, subprime loan volumes increased substantially in the first half of this year. Currently, subprime mortgages make up over 60% of U.S. ABS issuance volume. Many lenders are expecting net new growth for the remainder of 2004. But some of them have tempered their forecasts.
"As the market has grown beyond anyone's estimation, it appears there may be an additional contributor to growth: private subprime lenders taking market share away from Ginnie Mae," wrote DiMartino.
While subprime lending has been soaring in the first half of 2004, Ginnie Mae volume dropped by over 30% during the same period, DiMartino said. Ginnie issuance dipped to $72 billion in the first half of the year from $105 billion for the same period last year. Aside from the significantly reduced volume, private subprime lenders are now able to offer innovative products at higher loan limits - such as stated income loans, reduced equity loans and interest-only loans - and competitive mortgage rates, thus enabling them to move into markets that they previously have not tapped.
"Frankly, there is no way to be certain about how much of Ginnie Mae's volume shifted to the private sector versus Fannie Mae and Freddie Mac (also competing for FHA borrowers)," said DiMartino. But he said that the trend is significant because a typical Ginnie borrower now has other possible alternatives to the Ginnie Mae mandate, and this has pushed volumes in competing sectors that have stated income underwriting, LTV in the 90% to 95% range and FICOs typically in the 600 to 640 area. Furthermore, he says, the trend could cause the credit profile of Ginnie Mae pools to change, thus affecting performance characteristics.
There are also some competitive disadvantages working against the Ginnie Mae product. For one, Ginnie mortgage rates are usually marginally higher than conventional mortgage rates. Also, mortgage insurance and origination costs rolled into the rate can add another 50 to 60 basis points. However, after looking at rate surveys on various Web sites, the Ginnie Mae fixed-rate mortgage seems to hold a rate advantage versus fixed-rate subprime loans. DiMartino estimates the advantage is in the 0.35% to 0.85% range.
He enumerated the ways in which subprime lenders are attracting traditional Ginnie borrowers. These lenders are growing their broker and sales networks nationwide, thus penetrating new sectors. They are also offering innovative products with higher loan amounts and higher LTVs compared to Ginnie Maes, therefore providing more flexibility to borrowers. Aside from these, hybrid ARM loans are now helping private lenders compete in terms of pricing. There is also the intense marketing focus on debt consolidation and the first-time purchase borrower, as well as the emphasis on greater efficiency and client service.
Subprime lenders have definitely invested considerable resources to become time- and cost-efficient when underwriting loans, DiMartino said. "It is probably not an understatement to say that reducing origination costs was a key factor in the survival of many subprime mortgage lenders," he wrote. "Also, there is a perceived difference in the private sector's lending culture relative to the bureaucratic government lending mandate."
Ted Foster, vice president of MBS at Ginnie, said subprime products are not competitive in terms of pricing with those that could be securitized by Ginnie Mae. "If subprime lending were competitive with FHA/VA, it will be at the product level," said Foster. He added that it is only in a situation where borrowers wanted a product that wasn't available through the FHA or VA system, that these government agencies will lose borrowers to the subprime market.
He explained that if one were to compare product to product - the 30-year fixed-rate mortgage available through either a subprime lender or through a government lending institution - the subprime lender would not be price-competitive because of the ability to securitize FHA/VA mortgages through GNMA.
Foster also said that although GNMA gross volume has gone down for the last six months, the firm had historical volume levels in the last fiscal year - over $200 billion. "Gross volume is down but that's relative to a historical high," Foster said. He added that decreasing volumes are more a function of market dynamics, specifically rising interest rates, than losing market share to either the GSEs or the subprime market.
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