Ginnie Mae Issues a Warning to Its Partners

This week, Ginnie Mae issued a public notice to its issuer partners, flagging heightened prepayment levels in certain mortgage-backed securities (MBS) programs. The notice serves as a reminder to issuers regarding compliance requirements, with potential punitive measures for violations. Ginnie Mae has, for some time, experienced prepayment speeds that are higher than those in the rest of the industry, which causes VA loans to be more expensive than they otherwise would be. Prepayment risk, the risk that your MBS suddenly pays out instead of providing you with the long-term interest payments you are hoping for, is the primary risk factor associated with that product. 

Ginnie Mae’s prepayments are down relative to the pandemic norm, due to the higher interest rates, but remain above the rest of the industry: This is likely due to their partners churning their portfolio in a way that is explicitly prohibited though other factors may be at play as well.

The All Participants Memorandum (APM)

In a prior communication through an All Participants Memorandum (APM) in December 2017, Ginnie Mae outlined its methodology for monitoring prepayments within MBS programs. Operational performance metrics enable Ginnie Mae to pinpoint issuers experiencing unusually rapid prepayment rates, triggering heightened engagement from the agency.

The rationale behind Ginnie Mae’s vigilance lies in its concern over habitual refinancing, which could adversely affect the secondary market by disrupting the desired seasoning of securities. This churning behavior is not allowed, but it is also extremely difficult to police.

In its latest guidance, Ginnie Mae elaborated on recent concerns regarding prepayment trends. The notice dated April 5 highlights increased prepayment activity within specific program segments. Issuers are reminded that Ginnie Mae continues to monitor prepayment activity and performance, with non-compliance subject to proactive measures, including potential sanctions outlined in the MBS Guide and relevant Guaranty Agreements.

Starting 2024

January saw Piper Sandler released a note emphasizing lower prepayment speeds as a favorable factor for mortgage market performance projections in 2024. Notably, Ginnie Mae pools remained relatively stable at 5.7% in November 2023. The sluggish prepayment speeds suggest a continued decline in mortgage servicing rights (MSR) amortization expense. High-quality MSRs are associated with lower prepayment risk. That said, Ginnie Mae remains above the industry average and what really matters in this industry is how your offering compares to others available now, not how your offering compares to the past.

Piper Sandler anticipates these favorable conditions persisting despite short-term fluctuations in mortgage rates, as most borrowers are locked into rates below the prevailing market rate. A substantial decline in 30-year fixed rates, possibly to around 6%, would be necessary to significantly boost prepayment speeds, according to the firm’s analysis in January.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published April 12, 2024