Uncategorized
As Ginnie Mae II prices collapse, opportunity knocks
admin | January 24, 2020
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.
Price spreads between Ginnie Mae II MBS and UMBS have collapsed lately, driven by fears of increasingly fast Ginnie Mae prepayment speeds. A substantial pipeline of FHA and VA loans looks set to become very refinanceable in the next few months, pushing speeds up and MBS carry down sharply. Ginnie Mae II coupons may have repriced fairly with the exception of 1 WALA 3.0%s. Those pools trade at a price premium to TBA of around 1/32 and have a much lower likelihood of accelerating. And for extra protection, 1 WALA 3.0%s pools with 0% VA work well, too.
Price spreads between Ginnie Mae’s and UMBS have collapsed
Since November the price spread between Ginnie Mae II and UMBS 30-year pools has plummeted. For example, the spread on 3.0%s has fallen roughly 17/32s since the end of November with the price spread on 3.5%s down nearly 30/32s and 4.0%s down 28/32s. The swaps in 3.0%s, 3.5%s and 4.0%s are all well below levels seen over the last year even after adjusting for dollar price (Exhibit 1).
Exhibit 1: Price spreads have dropped to the lowest level since the start of 2019
For each coupon the exhibit shows the price spread between Ginnie Mae II TBA and Fannie Mae TBA (Ginnie Mae minus Fannie Mae) against the price of the Fannie TBA. The data run from the start of 2019 until January 22, 2020, which is marked as a red diamond. Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Fear of increasingly fast Ginnie prepayment speeds is hurting Ginnie prices
Ginnie Mae MBS in the last few months have shown much worse convexity than conventional MBS. Both the FHA and VA offer easy-to-use low-cost streamlined refinancing. VA borrowers are especially prone to refinance, since they tend to have much better credit than the typical FHA borrower and are more likely to take advantage of refinancing opportunities. Neither GSE offers a streamlined refinance program. In some cases the appraisal can be re-used or potentially waived, but this is not nearly as beneficial as the two government programs.
Seasoning ramps from the January prepayment report, reflecting December prepayment speeds, illustrate how much faster Ginnie Mae pools are prepaying than conventional pools (Exhibit 2). FHA loans cannot use streamline refinancing for at least six months after origination, while VA loans cannot use any VA refinance program for at least seven months after origination. Ginnie Mae MBS prepayment speeds on pools with more than six or seven months of seasoning spiked in December above 80 CPR while speeds on comparable conventional pools didn’t exceed 40 CPR.
Exhibit 2: Ginnie Mae pools prepay much faster than conventionals after 6 to 7 WALA
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Ginnie Mae speeds also tend to be slower than conventional MBS before seasoning six to seven months. Conventional lenders typically attempt to prevent refinancing at low WALAs but their methods are less effective than the FHA’s and VA’s. For example, a bank might prevent their employees from refinancing a loan before six months of seasoning. However, that same bank can’t easily enforce that requirement on a correspondent lender or broker; these third-party originators could process the refinance through a different lender to bypass any restrictions. Or the borrower could work with a different lender. However, in Ginnie Mae MBS the restriction is enforced by the FHA or VA, and the agency knows whether or not the original loan is eligible to refinance even if the lender is different. Therefore, at very low WALAs Ginnie Mae MBS actually prepay more slowly than conventional.
A large amount of Ginnie production is about to become very refinanceable
Since interest rates fell throughout most of 2019, many loans came to market in the middle and latter half of the year. So a large amount of Ginnie Mae MBS has not yet seasoned enough to be refinanced, but it is moving into a potential refinancing window over the next few months (Exhibit 3).
Exhibit 3: Many Ginnie Mae pools have not seasoned into the prime refinancing window
Fixed 30 year loans in Ginnie Mae, Fannie Mae, and Freddie Mac pools. Prepayment speeds are from December 2019. Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Some loans in Ginnie 3.5%s and 4.0%s have seasoned out of the refinance restrictions, which is why prepayment speeds have picked up relative to conventionals over the last few months. But many more loans are still less than six WALA, and the pending increase in speeds is weighing on TBA price spreads compared to conventional MBS. In conventionals, however, a far greater share of loans have already seasoned enough to easily refinance, so there is less risk of faster prepayments as the remaining loans season and therefore less pressure on prices.
In 3.0%s very few Ginnie Mae loans have seasoned enough to be able to refinance. The drop in the coupon swap represents investors pricing the risk of faster prepayment speeds, but the probability of faster speeds in this coupon may not be that high. The seasoning ramp suggests that 3.0%s will spike after 6 WALA, but they won’t reach the same levels as higher coupons unless interest rates also drop. Ginnie 2.5% production has started again but is still only about $5 billion a month, indicating not many borrowers are refinancing into that coupon at current interest rates. VA borrowers also face other hurdles to qualify for a refinance, such as a minimum 50 bp rate reduction. These hurdles might disqualify a 3.0% coupon VA borrower from refinancing. Therefore not many 3.0% borrowers should refinance unless rates fall.
Ginnie Mae II 3.0% pools with 1 WALA could be a sweet spot
An investor buying a 3.0% Ginnie Mae MBS pool at 1 WALA would have almost six months of prepayment protection. And if rates increase then the faster prepayment speeds priced into the coupon may never materialize. And there is the potential for significant upside if the price spread to Fannie Mae MBS returns to historical levels. The pay-up for 1 WALA 3.0%s for January is slightly below 1/32 and for February slightly above 1/32. The small pay-up seems inexpensive for the initial prepayment protection and the potential upside into a sell-off.
Investors that are able to buy Ginnie Mae custom pools, which are not TBA-deliverable, can consider even better convexity paper. For example, pools that do not contain VA loans should have much better convexity than those that do. The 3.0% coupon tends to have a heavier concentration of VA loans, so a 1 WALA 0% VA pool should prepay much better than the 3.0% TBA. These pools tend to trade at lower pay-ups than many other types of call protected collateral, so might be another inexpensive way to benefit from low Ginnie Mae prices.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
