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Ginnie Mae securities keep digesting the new FHA guidelines

Brent Nyitray, CFA, MBA

Essential updates for homebuilder and REIT investors (Part 6 of 6)

(Continued from Part 5)

Ginnie Mae and the to-be-announced market

The Fannie Mae to-be-announced (or TBA) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go, such as the Federal Housing Administration (or FHA) and Veterans Affairs (or VA) loans.

The biggest difference between a Fannie Mae mortgage-backed security (or MBS) and a Ginnie Mae MBS is that Ginnies have an explicit guarantee from the federal government. Fannies don’t have a guarantee, just a “wink-wink, nudge-nudge” guarantee. As a result, Ginnie Mae MBS trade at a premium compared to Fannie Mae TBAs.

Ginnie Mae mortgage-backed securities affected by new FHA guidelines

The ten-year bond rallied 10 basis points, with yields decreasing from 1.94% to 1.84%. Ginnie Mae TBAs were more or less unchanged, even in the low rate stacks. The higher-coupon Ginnie TBAs were down. This is a function of continued low rates and also changes out of the FHFA that make FHA loans cheaper to get—and therefore more attractive to refinance.

Investors have been switching out of Ginnie Mae TBAs and into Fannie Mae TBAs. Mortgage REITs are big users of TBAs in that they can increase or decrease exposure very quickly. While older MBS issues can become illiquid, there’s always a large, liquid market in TBAs. As a result, big moves by REITs will affect the TBA market. Note that mortgage rates fell 10 basis points last week even though TBAs didn’t move. Mortgage originators are looking to take advantage of this unexpected gift of low interest rates and are preparing themselves for at least a mini refinance boom.

Implications for mortgage REITs

Mortgage real estate investment trusts (or REITs) such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs.

Increases in prepayment speeds are a negative for mortgage REITs. However, you can mitigate that risk by switching into REITs focusing on adjustable-rate mortgages, like MFA Financial (MFA) and Capstead Mortgage Corporation (CMO). Investors who aren’t comfortable looking in depth at MBS portfolios should look at the Mortgage REIT ETF (MORT).

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