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New FHA guidelines throw Ginnie Mae securities for a loop

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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.

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Ginnie Mae mortgage-backed securities affected by new FHA guidelines

The ten-year bond rallied 17 basis points, with yields decreasing from 2.20% to 2.11%. Ginnie Mae TBAs rallied 9 ticks to close at 105 20/32. However, they underperformed Fannie Mae TBAs, which rallied 17 ticks.

President Obama announced changes to the mortgage insurance premium for FHA loans, cutting it from 135 basis points to 85 basis points. This will make FHA loans cheaper for borrowers. On the other hand, it makes the FHFA insurance fund less solvent. The added risk, as well as adjustments to forecast prepayment speeds, caused Ginnie spreads to blow out mid-week. Dealers swapped Ginnie Mae TBAs and bought Fannie Mae TBAs.

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, that risk can be mitigated 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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