Ginnie Mae refinancings continue to increase
admin | October 25, 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.
Investors in Ginnie Mae MBS should get ready for prepayment speeds to top conventional MBS over the next few months. The MBS government refinance index increased in October and is currently slightly above the peak levels reached in August when interest rates stood lower. The conventional index has fallen back to levels posted in July, however, before rates fell at the end of that month.
Prior to the summer refinance wave, all three indices tracked very closely (Exhibit 1). But the government index increased more than the conventional index when rates fell in late May and has remained elevated since then. The spread between the government and conventional index increased even more in October, and the government index is currently a little more than double the conventional index.
Exhibit 1: MBA Refinance Index
Source: Bloomberg, Amherst Pierpont Securities
Making the continued strength even more surprising is that mortgage rates are slightly higher than the low levels reached in August. The average mortgage rate in October was an estimated 3.66%, which is roughly the same as the average rate in July and August combined—July was roughly 10 basis points above October and August was roughly 10 basis points below October.
The average of the refinance index in October should be similar to the average level across July and August combined since the average rates were so similar. This is true for the conventional index, which was only 3% higher over the first three weeks of October compared to July/August. But the government index was 21% higher in October compared to July/August.
One way investors can add call protection is by avoiding VA loans. Compared to FHA borrowers, VA borrowers generally have better credit and are better prepared to refinance when rates fall. Many of these borrowers chose the VA loan because it was cheaper than a conventional loan, while FHA borrowers did not have the funds to make a conventional down payment. It is likely that VA applications are a large reason the government index is so high.
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