By the Numbers
Strong demand for Ginnie custom pools continues
This material is a Marketing Communication and does not constitute Independent Investment Research.
Investor appetite for Ginnie Mae custom pools has been strong this year. Production has surged to more than 35% of total pool issuance. Pay-ups have also trended higher, in part since this process leaves behind loans with lower convexity in TBA-deliverable multiple issuer pools. Historically the ineligibility of custom pools for TBA delivery has restrained production. But heavy demand for Ginnie Mae CMOs has unlocked supply since liquidity isn’t a consideration for pools placed in CMOs.
Custom pool issuance remained strong in the second quarter of the year, falling just slightly compared to the first quarter (Exhibit 1). Over 35% of new issue Ginnie Mae pools went into custom pools, an all-time high. This is about 10 percentage points higher than most of 2024 and roughly 15 percentage points higher than in 2023. Much of the collateral used are low loan balance pools, predominantly FHA. A growing share of pools are backed by higher balance FHA loans. And rural housing loans, which also have very good convexity, are typically placed in custom pools.
Exhibit 1. Ginnie Mae custom pool issuance stayed elevated in the 2nd quarter
Source: Ginnie Mae, Santander US Capital Markets.
As more custom pools came out over the last year, pay-ups for collateral trended higher (Exhibit 2). This chart shows the average pay-up on originator bid lists for pools with at most a $225,000 original loan size. Originators have primarily met the demand by growing the number of low loan balance specified pool categories to include loans with higher balances. Production of FHA-only pools with high loans sizes has also increased. This process changes the composition of the TBA-eligible multi pools—the remaining loans have higher loan sizes and a higher concentration of VA loans. This lowers TBA convexity and value. Pay-ups increase as the TBA value drops.
Exhibit 2. Pay-ups have trended higher over time as TBA quality worsened
Average pay-up for Max $225k pools in each quarter.
Source: Ginnie Mae, Santander US Capital Markets.
This is a concerning development for policymakers and homeowners. Primary mortgage rates are influenced by the TBA market, which originators use to hedge their mortgage pipelines. Lower TBA prices raise the MBS current coupon and therefore could raise primary mortgage rates. The mortgage rate for FHA borrowers could become tied to the prepayment behavior of VA borrowers with high balance loans. In principle the specified pool pay-up for smaller balance FHA loans could be passed on to the borrower to lower the rate; in practice this may not happen.
The worst-case scenario is that the TBA has deteriorated enough to trigger a race to the bottom. The TBA price represents an average of the price of loans in the multi pools—some loans would have a positive pay-up if pooled separately, others would have a negative pay-up. As more positive pay-up loans are diverted into custom pools the TBA price drops. As the TBA price falls, some of the remaining loans will command higher pay-ups and could be put into customs. If this process continues unchecked the multi pools, and TBA, would be backed by only the lowest convexity collateral—high balance VA loans.
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