By the Numbers
Ginnie Mae multiple issuer pools keep deteriorating
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Ginnie Mae multiple issuer pools have continued to weaken over the last two months as issuers put more loans into custom pools. Customs accounted for over 40% of all Ginnie Mae pool production in August and September, the first time this has occurred. The VA share in multi pools reached 62.8%, the highest level outside of a few months during Covid. And the gap between the average loan size of multi pools and total production is the highest it has ever been. All of these are signs that the multi pool, and therefore Ginnie Mae TBA, will continue to become more negatively convex.
Custom pool issuance as a share of total issuance reached record levels in August and September (Exhibit 1). Custom issuance hit 42% in August, the first time it breached 40%, and jumped to 43.7% in September. Lower mortgage rates likely helped fuel this move as investors grew more concerned about refinance activity, increasing the demand for call-protected custom pools.
Exhibit 1. Custom pool issuance continues to set records
Custom pool issuance as a share of total Ginnie Mae issuance. Fixed-rate 30-year MBS. Includes Ginnie Mae 1 and 2 pools. Ginnie Mae 1 production started slowing in late 2009 and had largely stopped by 2014.
Source: Ginnie Mae, Santander US Capital Markets
The share of VA loans placed in multiple issuer pools also climbed to a record high outside of Covid (Exhibit 2). But part of the reason was that, during Covid, heavy refinance activity boosted VA origination relative to FHA origination. One way to control for that is to compare the difference between the VA share in multi pools and the VA share of all production. That spread is now over 20%, while during Covid it only briefly exceeded 10%. This reflects the greater efficiency of pooling call-protected collateral into custom pools. VA loans are known to refinance more quickly than FHA and conventional loans when mortgage rates fall.
Exhibit 2. The VA share in multi pools is at its highest outside of Covid
Source: Ginnie Mae, Santander US Capital Markets.
The average loan size of multiple issuer pools has also grown relative to overall production (Exhibit 3). This gap has also reached another record level. Larger loans typically refinance faster than smaller loans, so custom pools often contain smaller loans. In absolute terms the average loan size of the multi pools has been stable over the last few months, but the population loan size has dropped. One reason is likely the increase in rate-and-term refinance activity. Those loans are typically smaller than purchase loans if home prices are increasing.
Exhibit 3. The loan size gap between multi pools and total production is the widest ever
Source: Ginnie Mae, Santander US Capital Markets.
Pooling in Ginnie Mae MBS continues to trend towards placing higher convexity loans, like FHA and low loan balance loans, into custom pools. This lowers the convexity of the TBA-deliverable multiple issuer pools. This can turn into a downward spiral—pay-ups increase as the TBA weakens, making it profitable for originators to build custom pools backed by formerly marginal collateral. This issue is discussed in more detail here.
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