(Bloomberg) -- Homeowner forbearance requests in Ginnie Mae-backed mortgages have led to elevated buyouts and weighed on their performance, a trend that may continue through summer’s end.
The Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, allows any U.S. homeowner with a taxpayer-backed mortgage to demand forbearance and stop paying their loan for six months, with the option to extend it for another six months. At this time just shy of 4 million homeowners are in forbearance.
When underlying borrowers fall into forbearance this heightens the risk that the loan will eventually go into default and need a buyout (which for mortgage investors are prepayments by another name.) The recently released June speed report saw a buyout-driven 36% month-over-month surge in aggregate Ginnie Mae II 30-year prepayments. In contrast, the Fannie Mae 30-year universe saw a 12% increase.
Ginnie Mae supports mortgages made to borrowers who make little to no down payment (Fannie and Freddie typically require 20%) and who, on average, have lower credit scores along with higher loan-to-value ratios than their conventional counterparts. The latest report from the Mortgage Bankers Association showed 10.3% of Ginnie Mae mortgages in forbearance, compared to 5.6% seen in Fannie Mae and Freddie Mac.
This difference has investors concerned and helps explain the dramatic drop in Ginnie Mae II/Fannie Mae coupon swaps. The 30-year Ginnie Mae II/Fannie Mae 3% swap fell to just shy of 3/32 at Wednesday’s close, its lowest for at least half a decade, according to data compiled by Bloomberg News.
One example of the risks in 30-year Ginnie Mae is shown by the MA2302 major pool, which saw its prepayment speed rocket to 47.5 CPR in June, a 168% monthly increase. The culprit was a buyout CPR of 37.7 (from 8.1 in May), and with the pool sporting a dollar price of just over $107 that’s not something any investor wishes to see, as mortgages are prepaid (and bought out) at par.
As for its future, while the pool’s underlying 30-day delinquency stood at 5.8% in May, it dropped to just 4.1% after the June buyouts.
Regarding the Ginnie Mae universe as a whole, Wells Fargo & Co. analysts warned in a recent report that it is likely to see “significant increase in buyout activity” over the coming months.
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