A short-term default is not expected to have any effect on GNMA MBS cash flows because of their collateralized nature, according to a new Barclays Capital report.

Barclays analysts said that while U.S. government and Treasury securities are in certain jeopardy in the event of a default, GNMA MBS avoid this fate due the fact that their principal and interest payments are based solely on the performance of underlying collateralized loans.

MBS holders receive cash flows directly by the issuers, servicers, or agent. The report stated that assuming underlying loans perform, the only risk to MBS payments is if the U.S. government goes out of its way to seize the P&I payments”, which the firm believes is highly unlikely.

However, in the event that a servicer defaults at the same as a U.S. government default, a cash flow short-fall in delinquent loans could occur. Barclays analysts once again believe this to be very unlikely, with very minimal potential impacts.

Despite restricting the ability of the FHA to honor its “guarantee of making servicers whole on loans that have suffered losses due to foreclosures or loss mitigations”, a default is not expected to alter the buyout behavior of servicers. The report attributed this to the fact that servicers receive reimbursement regardless of “whether or when” the loan is bought out and therefore should not influence the process either way.

The servicer is required to continue P&I payments to the investor as long as the delinquent loan stays in the MBS pool.

Additionally, Barclays analysts do not anticipate future issuance of GNMA to be affected by a U.S. default either. They believe that due to the fact that only $155 billion worth of FHA-insured mortgages have been issued this fiscal year thus far, out of the $400 billion annual limit imposed by Congress, there is “ample room” for new FHA origination. A default would not concern this limitation, and therefore should not interfere with GNMA issuance.

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