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The government refi index remains elevated

| September 27, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The MBA Refinancing Index has fallen from recent peak levels, but the broadly quoted index says very little about government loan activity. Investors in Ginnie Mae pools need to keep a close watch on the MBA’s government loan refinance index for guidance on Ginnie Mae prepayment speeds, where the pace is much faster than the conventional market.

The MBA’s overall index, the conventional index, and the government index tell different stories (Exhibit 1). Prior to the summer refinance wave, all three indices tracked very closely. But the government index increased much earlier than the conventional index when rates dropped in late May. And the government index has not fallen nearly as much as the conventional index.

Exhibit 1: MBA refinance index

Source: Bloomberg, Amherst Pierpont Securities

The chart also illustrates that government refinance activity is given little weight in the overall index, which remains very close to the conventional index after the government index diverges. Ginnie Mae pools are 34% of outstanding agency MBS pools but in August accounted for 40% of overall prepayments. The overall refinance index, if it were representative of agency prepayments, should give a much larger weight to government loans. Instead, investors in Ginnie Mae MBS should always use the government refinance index as a guide for how their pools might prepay.

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