Remarks of John Getchis, Senior Vice President, Capital Markets, Ginnie Mae
"Single Security TBA: Should We Do It, Can We Do It?”
Monday, Oct. 22, 2012
Mortgage Bankers Association Annual Convention & Expo
The question that most often comes up is “Are we going to combine Ginnie Mae I and Ginnie Mae II security programs?” I’d like to take you through why we raise the question and discuss some of the issues that are more specific to the Ginnie Mae programs. We do maintain two security programs: Ginnie Mae I, the original mortgage-backed securities that began in 1970, and Ginnie Mae II, re-designed to facilitate multiple Issuers as well as larger pools. Pricing in the marketplace exists for both security stacks, and issuers have embraced the Ginnie Mae II over the past couple years.
What we see is that the Ginnie Mae II program has been a very dominant selection by Issuers. The potential challenge is that because of Ginnie Mae’s position on affordable housing, we don’t think that our volumes, our market share, etc., will continue at the current pace. And, the current pace is what provides the tremendous liquidity that these securities are enjoying in the marketplace right now. So we say that the possible scenario in the future is that there will be smaller issuance volumes to coincide with the housing market, smaller issuance volumes of Ginnie Mae’s with respect to private capital starting to reappear into the housing policy [discussions], and smaller market share as Ginnie Mae reverts back to its affordable housing mission.
So the question has always been “Is maintaining two securities programs efficient enough with respect to maintaining good markets, especially in a TBA market. Our stakeholders are not only investors and Issuers, but there is also the dealer community which provides machinery to move the securities into the marketplace each month. They maintain inventories, they provide each of us bid offer spreads on our origination activity, and they bridge the timing of settlement from current to forward months through the dollar roll markets which is necessary for either issuing CMOs or hedging pipelines. So, obviously the efficiency we have in our securities programs merits a considerable amount of focus at Ginnie Mae.
Over time, Ginnie Mae I’s have been in a steady decline of monthly MBS issuance, roughly at a 50% peak pre-2010 and then continuing to decrease now to about a 20% component. Presently, Ginnie Mae I’s represent only 1 in 5 of the MBS issuance incurred in today’s marketplace. We also saw earlier in 2011 that the outstanding stock of each of these programs has crossed each other as well. Somewhere in the late fourth quarter 2011 the Ginnie Mae I program was not replacing its outstanding stock and payments exceeded the issuance. Whereas the Ginnie Mae II program has been capturing the new originations and outpacing the pre-payments speeds within that portfolio. [The total outstanding balance of Ginnie Mae IIs now exceeds that of Ginnie Mae Is.]
Our annual issuance varies quite a bit over time but we recently completed our fiscal year in September and there was $388 billion of Ginnie Mae I and Ginnie Mae II securities issued. That’s not the historic norm and that’s not the operating norm. We can all suppose at what the norm would be, but it’s probably not at this peak as housing policy changes, private capital re-enters, and the work out by the conservatorship of the GSEs collectively influence that forecast.
Throughout the course of our history, there are highs and lows in our annual market share depending on the operating environment. Right now in today’s housing cycle, we’re probably roughly the size of Freddie Mac in the monthly issuance of Ginnie Mae’s, and we’re also roughly about the trading frequency as well. So we’re a small market; we’re a small component of total origination volume. One can probably forecast that were not going to maintain that type of market share regardless of the size of the total origination market. So what implications does that have? Basically, the market, the availability of collateral from dollar roll providers as well as some of the efficiency in the pricing starts to get very lumpy out there. That’s really not good for the efficiency of a securitization program or very good with keeping lending costs as efficient.
If you look where we are today, you’ll see Ginnie Mae II’s actually have a superior price than Ginnie Mae I’s, even though they have a longer delay day, and that they are the younger security. You see other coupons have different collateral profiles where Ginnie Mae I is still more dominant in the price opportunity. That could be a function of just merely delay days or the difference in the pre-payment expectations that have been placed on each of these higher coupons. But nonetheless I think that the environment right now enjoys great liquidity with respect to the current coupon. The Ginnie Mae II 3% coupon when it first showed up in the start of the year was probably about, almost half a point weaker, than the Ginnie Mae I price. So as originations and MBS volumes are redirected through Ginnie Mae II’s, the 3% coupon, has enjoyed the liquidity and it’s been endorsed in the market place and quite frankly is being used heavily. And you see, with a pricing like that, it gives Issuers the opportunity to make some execution decisions of how they pool with focus upon prices, probably more times than past opportunities. It is now very compelling to select Ginnie Mae II over Ginnie Mae I because of its higher price and a longer remittance date.
What are the challenges? Foremost, our Ginnie Mae I’s and II’s have different remittance delay days. If you’re going to have a unified security, you have to either slow down one or speed up the other. We know that’s a dichotomy, because Issuers would rather not pay the monthly remittances earlier. They would probably like to have the 20-day delay as opposed to the 15-day delay and investors always like to get their money sooner, so there’s a little bit of difference there, but that’s the math about where we sit. The other thing in terms of design features is clearly the multiple Issuer pooling satisfies fairly both sides of Issuer and investor needs. New Issuers can create and participate in the superior pricing from larger pools, through the Ginnie Mae II program, which is a multiple Issuer opportunity. That certainly allows the accumulation of large pools, a diversification across Issuers, which are features the investor community strongly prefers.
The question comes up is always about liquidity. As we go through this market and contemplate some changes here should we revisit what is a definition of TBA-eligible? Presently a Ginnie Mae II pool, which in a single Issuer form, is not TBA eligible, although some of the collateral characteristics probably could reflect TBA eligibility under the other TBA criteria. So there’s probably a need to re-visit that definition to keep the efficiency within our marketplace.
“Legacy, legacy, legacy”, we all mentioned that on the panel here. The navigation that’s required to conduct something like this is, whether it is for the GSEs or for Ginnie Mae I and II, is “Do we create orphans out of the existing programs?” That really doesn’t help or create liquidity if you created a third Ginnie Mae and kind of unwind I and II. So that’s one of the design features that have to be addressed. We also know that there’s a math function in there, as you see, the coupon stack trades at different prices, it’s an arbitrage, if you will, an execution opportunity, so somebody’s giving and somebody’s getting There has to be conversion about compensation somewhere in this process.
Back to the original questions: “Should we do it; can we do it?” Right now, almost $40 billion a month in Ginnie Mae mortgage-backed securities are being issued in this current environment. You see the pricing between I’s and II’s converging. The question is, in the future scenarios, when it becomes smaller, does it get bumpier? Does it get less efficient? Are you forced, as originators of Ginnie Mae production, to hedge with Fannie Mae’s more than you care to? Then you have your basis risk entering into the mechanism. I think “can we do it?” is more about “how we do it?” There are a lot of interested parties, stakeholders, as we call them at Ginnie Mae, and I think what is most necessary is the stakeholders have to be included in a forum of the design. There’re going to be opposing forces but some mutual interest to be worked on, which is really the goal of keeping liquidity high for all the participants in this marketplace. There has to be an agreement of how long this takes. So there has to be a phase in period, and there has to be support from Ginnie Mae with respect to the convertibility process. I think some of the things that we hope to place in the marketplace to improve liquidity have more to deal with giving the investors comfort with what is in the pools. And so, as our President Ted Tozer has stated, Ginnie Mae is working to have the capability to provide loan-level disclosure at the end of 2013. Investors will benefit from knowing what’s in the MBS “soup” in great detail to improve the understanding. of the investment.
And again not necessarily in Ginnie Mae’s control, but does it make sense to you, once we know more about our securities with the disclosure, does that create comfort to really ask some hard and fresh questions with respect to TBA eligibility? I know one thing will be certain is that when I stand in front of you, if I’m fortunate enough this time next year, the question still will be asked and I hope that we have our forum that’s developed so I can give you more specifics of what are really the more precise obstacles and a pathway to consider a project such as this.
Thanks very much.