Why Did Ginnie Mae TBAs Underperform Fannie Mae TBAs?



Ginnie Mae and the TBA market

The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan—the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker makes a Veterans Affairs or Federal Housing Authority loan, that loan is securitized and put into a Ginnie Mae TBA.

The biggest difference between Fannie Mae MBS (mortgage-backed securities) and Ginnie Mae MBS is that Ginnie Mae MBS have an explicit guarantee from the federal government. Fannie Mae MBS don’t have a guarantee like that. As a result, Ginnie Mae MBS trade at a premium compared to Fannie Mae TBAs.

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Ginnie Mae TBAs pick up 3 ticks

The ten-year bond yield, tradable through the iShares 20+ Year Treasury Bond ETF (TLT), fell by 5 basis points to 1.8% for the week. Ginnie Mae TBAs rose by three ticks. They closed at 105 19/32 and underperformed Fannie Mae TBAs.

Mortgage REITs are big users of TBAs because they can raise or lower exposure quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs.

Implications for mortgage REITs

Mortgage REITs such as Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs. In the fourth quarter, American Capital Agency moved down aggressively in the coupon in its TBA portfolio. This move accounts for some of the higher coupon TBAs’ underperformances. The rate of prepayments is driving these trades. Non-agency REITs such as Two Harbors Investment (TWO) aren’t big TBA holders either.

Investors interested in trading in the mortgage REIT sector through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).


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