By the Numbers

Ginnie Mae drives resurgence in CMO issuance

| March 22, 2024

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 volume of new agency CMOs issued over the last few months has been on the rise along with growing interest in deals backed by Ginnie Mae pass-throughs. Production surged in February in both Ginnie Mae and conventional deals. Bank demand for Ginnie Mae MBS is high due to their preferential treatment under capital rules, and this has improved the relative value of conventional MBS for non-bank investors. The growing demand for Ginnie Mae CMOs has repercussions in the pool market. More deals are using custom specified pools, in particular pools backed by only FHA loans, which weakens the quality of the TBA. And heavy CMO demand make it more likely that Ginnie Mae dollar rolls will run special in production coupons.

Issuance of CMOs has reached the highest levels since the end of the Covid refinance wave (Exhibit 1). From 2015 through 2019, CMO production averaged roughly $14 billion each month and pool issuance about $110 billion monthly. Both increased in 2019 as there was a small refinance wave late in the year. Then spiked when rates plummeted at the onset of Covid. Volumes peaked around the end of 2020 and fell in early 2021 but stayed elevated throughout the year. Then production slowed steadily in 2022 when mortgage rates increased and loan origination slowed. Pool issuance was relatively steady during 2023 and into 2024, but CMO volume trended higher in the second half of the year and into 2024.

Exhibit 1. CMO and pool issuance volume.

Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Ginnie Mae issuance volume began to increase at the start of 2023 (Exhibit 2). Conventional volumes were relatively steady early in the year, increased mid-year, then fell at the end of 2023 before rebounding in 2024. But much of the trend in higher volumes is due to demand for Ginnie Mae CMOs. The better capital treatment is a big factor driving banks to choose Ginnie Mae over conventional. Banks increased their focus on Ginnie Mae bonds in 2022 when they took big mark-to-market losses on their MBS positions when rates increased. The focus on Ginnies intensified after the failures of Silicon Valley Bank and Signature Bank. And the full-faith-and-credit guarantee always boost the appeal of Ginnie Mae bonds to foreign investors.

Exhibit 2. Conventional and Ginnie Mae CMO issuance volume.

Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Ginnie Mae CMOs are often a little easier to produce when backed by specified pools. Ginnie Mae specified pools, called customs, cannot be delivered in the Ginnie Mae TBA contract. That lack of liquidity means those pools often may trade a little lower than their intrinsic value, whereas conventional specified pools benefit from the backstop of TBA deliverability. But TBA deliverability is meaningless for pools locked in a CMO, and losing that liquidity is a disadvantage when making conventional CMOs.

The share of monthly pool production placed in CMOs has held relatively steady (Exhibit 3). The light blue line shows the actual share of pool production placed in CMOs, and the dark blue line smooths that series. The red line shows the long-term trend, which has held steady. CMO volumes ran a little below the trend during 2020 and 2021; this is likely because the Fed was buying a fixed $40 bn a month of MBS pools during those years. That left a smaller amount of new production available for CMO usage. The share of pools being locked in CMOs rose throughout 2023 and jumped higher in February 2024.

Exhibit 3. CMO production as a share of pool volume.

Smoothed series created using a Butterworth filter to filter out month-to-month noise and some annual seasonality. Trend is a simpler linear regression.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Ginnie Mae CMOs were primarily responsible for the increasing placement of pools in CMOs (Exhibit 4). This shows the smoothed series for conventional and Ginnie Mae CMOs. The share of Ginnie pools first increased in late 2018, while the share of conventional pools being placed in CMOs dropped. There were some big ups and downs, but in general the Ginnie Mae share fell in 2019 through mid-2020, increased until the end of 2021, slowed in 2022, and increased in 2023 and 2024. By the end of the year over 30% of new pool production was being put into CMOs.

Exhibit 4. Conventional and Ginnie Mae CMO share of pool volume.

Smoothed series created using a Butterworth filter to filter out month-to-month noise and some annual seasonality.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.

The big spike at the end of the chart came in February. Production of CMOs skyrocketed, but pool issuance was relatively low. February is typically one of the lowest months for pool production, especially in a turnover-dominated environment since home sales are at their seasonal low point. There was a modest pickup in refinance issuance, and that was more prevalent in Ginnie Mae pools. The February level is probably not sustainable but does signal the continuing interest of investors in agency CMOs.

The share of conventional pools used for CMOs has trended lower since 2019. It picked up a little in the fall of 2023 then slowed at the end of the year before spiking higher in February 2024. But even the peak in 2023 only reached the somewhat depressed level from 2019 and 2020.

Going forward it is likely that investor interest in Ginnie Mae CMOs will remain stronger than for conventional MBS due to the interest from bank and foreign investors. The Ginnie Mae TBA quality should continue to fall as more custom pools are created and placed in deals. The lower TBA quality should also weaken the Ginnie/Fannie swap, and that could make it easier for CMO desks to create Ginnie Mae deals backed by TBA-deliverable multi pools. Ginnie Mae dollar rolls are also more likely than conventional dollar rolls to run special given the greater demand for pools to fill CMOs.

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

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 © 2024 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.

The Library

Search Articles