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Dodging default risk in Ginnie Mae project loans

| December 4, 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.

Trends in delinquency rates in Ginnie Mae project loans during the pandemic have been similar to those seen in the aftermath of the 2008 financial crisis, though total delinquencies so far remain well below prior peaks. There are some pockets of risk: deals vulnerable to prepayment triggered by high levels of delinquencies or by delinquencies concentrated in construction loans. Senior housing also poses some risk.

Delinquency rates across all Ginnie Mae project loans are currently 1.48% (Exhibit 1). That is the percentage of delinquent unpaid principal balance (UPB), not the percentage of delinquent loans, though the two are very close. Over half of those delinquencies are in the 90+ day bucket. Ginnie Mae does not publicly disclose loans in forbearance but does mark loans in forbearance as delinquent. The vast majority of loans in the 90+ day delinquency bucket presumably have been in forbearance for between three and six months.

Exhibit 1: Historical Ginnie Mae project loan delinquency rates

Source: Ginnie Mae, Amherst Pierpont Securities

Repayment periods have started for most loans in forbearance, and as the loans gradually cure, many of the 90+ day delinquent loans will move to the 60-day and then the 30-day delinquent bucket and then eventually back into performing status. Others will transition into default. Although construction loans only comprise about 21% of outstanding project loans, they historically have tended to become delinquent and default at two times to three times the rate of other project loans. During the pandemic this trend is remaining intact, as construction loans have a delinquency rate of 2.75%, about 2.5 times the 1.10% delinquency rate of standard project loans (Exhibit 2), and currently account for 39% of all delinquent loans.

Exhibit 2: Ginnie Mae project loan delinquency rates

Note: Delinquency data as of November 2020. This includes all currently outstanding Ginnie Mae project loans, approximately $10 billion of which are not in REMICS. Prefix definitions are in the Appendix.
Source: Ginnie Mae, Amherst Pierpont Securities

Several of the project loan types are not currently in outstanding GNR REMICs, including CS, LS, RX and PL types. However, the overall delinquency rates by loan type in REMICS are similar. Investors looking to avoid concentration risk of involuntary prepayments should monitor the deals with notably high levels of overall delinquencies and delinquencies concentrated in construction loans (Exhibit 3).

Exhibit 3: Deals with concentrated default risk

Note: Data as of 12-3-2020. Source: Bloomberg, Amherst Pierpont Securities

Seniors housing remains a trouble spot

Senior housing facilities continue to have elevated delinquency rates: 2.0% of loan balances of health care facilities are in some stage of delinquency compared to 1.27% of multifamily properties (Exhibit 4). The health care facilities represent 37% of delinquent loan balances and 27% of GNR multifamily REMIC balances outstanding.

Exhibit 4: GNR multifamily REMIC delinquency rates by property type

Note: GNR multifamily REMIC loan balances total $121.5 billion as of 12/3/2020. Approximately $5 billion of that total does not list a property type. Data as of 11/16/2020 tape date.
Source: Bloomberg, Amherst Pierpont Securities

Investors looking to avoid concentrated default risk should also get proper compensation for deals overweight health care properties.

Appendix: Prefix codes for Ginnie Mae Project Loans

Note: There is no listed prefix code of RX that could be found in the documentation but it does appear in Ginnie Mae’s project loan database.
Source: Ginnie Mae

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