By the Numbers
Heavy demand for Ginnie Mae CMOs
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Demand for Ginnie Mae CMOs has jumped in recent months, with issuance share reaching levels last seen a few times in 2019. Chalk it up in part to a lower price spread on Ginnie Mae compared to conventional MBS, which may be making it easier to acquire collateral for these deals. A maturing market for Ginnie Mae custom specified pools has also helped.
The share of CMOs backed by Ginnie Mae pools has exceeded 50% each month since March, returning to levels last seen in early 2019 (Exhibit 1). This is especially notable since overall CMO volume has been much higher in 2021. From 2016 through 2019 monthly issuance average roughly $15 billion. But CMO volume jumped to $27.5 billion a month in 2020 and has continued into 2021.
Exhibit 1. An increasing share of CMOs are backed by Ginnie Mae MBS
Note: A 3-month moving average is used for smoothing.
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Since the start of the pandemic, Ginnie Mae has been a smaller component of new MBS pool issuance. There are a few reasons for this. FHA loans refinance at a slower pace than conventional loans, lowering Ginnie Mae’s share in a refinance wave. This effect has been greater during the pandemic since many FHA loans used forbearance, which also blocked a refinance. And last summer many banks bought out nearly all their delinquent loans, but many of those loans may still be delinquent and ineligible for re-pooling. As a result, the share of new pool supply being locked into CMOs has increased (Exhibit 2).
Exhibit 2. A larger share of Ginnie Mae MBS issuance is used by CMOs
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Ginnie CMOs have also become more attractive as market participants became comfortable with custom pools. Custom pools are the only avenue to create pools backed by mortgages with better convexity, but they cannot be delivered into a TBA contract. These pools usually trade with a liquidity discount. However, this liquidity disadvantage does not matter for pools locked inside a CMO, and the price discount makes it easier to structure a deal.
Ginnie Mae MBS have also been trading at an OAS close to the OAS for conventional MBS throughout the pandemic (Exhibit 3). Ginnie Mae MBS typically traded at a tighter OAS than conventional MBS prior to the pandemic, likely due to the full faith and credit government guarantee. It may be easier to structure deals backed by Ginnie Mae pools available at wider OAS, contributing to the growth of Ginnie Mae CMOs.
Exhibit 3. Ginnie Mae current coupon OAS is slightly wider than conventional
Source: Bloomberg BAM prepayment model, Amherst Pierpont Securities
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