Because Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. government, investors are not subject to credit losses. However, the potential for non-performing loan buyouts creates an additional layer of prepayment risk. As with any prepayment, investors receive the unpaid principal balance of the loan that goes through buyout. However, for all 30-year pass-throughs with 3% and higher coupons trading above par, any prepayment (due to a buyout or otherwise) represents a loss to the investor.
So how much of a concern are buyouts for investors?
Prepayments for Ginnie Mae MBS are comprised of a voluntary component (the conditional repayment rate, CRR) along with an involuntary portion (the conditional buyout rate or CBR). Since FHA and VA loans, the primary collateral backing Ginnie Mae MBS, typically behave differently, we analyze their performance separately. The analysis that follows is based on all 30-year FHA and VA loans originated since 2014 that are included in Ginnie Mae pools. The chart below illustrates the dramatic convergence in speeds relative to the end of 2016 when VA loans were paying 7% to 8% faster than FHA loans.
Deconstructing the overall prepayment rate reveals that the convergence is due to both a narrowing of the CRR difference along with a spike in the CBR for FHA loans beginning in June of this year.
Serious delinquencies are a leading indicator of future buyouts. Comparing the percentage of 90-day (or more) delinquencies as a percentage of the outstanding balance indicates a fairly consistent difference (54 bps on average) between FHA and VA loans, with both trending upward.
If we further stratify the loans based on vintage and look at the patterns as the loans age, will there be any material differences?
The 2014 vintage FHA cohort has performed poorly based on the buyout rate relative to the newer vintages. The 2016 vintage appears to be aging in a similar manner to the 2015 vintage while the early results for the 2017 cohort place it somewhere between the 2014 and 2015 vintages. All of the VA vintages have experienced fewer buyouts than their FHA counterparts. The 2016 VA cohort is the standout thus far followed by the 2015 and 2014 vintages. With only a few months of data to go on, the 2017 VA loans are outperforming the 2014 and 2015 loans, but are not as stellar as the 2016s.
The patterns largely carry over to the 90-day or more delinquencies. 2014 vintage FHA loans generally show the highest serious delinquency percentage at any given age. However, the 2015 cohort has experienced a sharp uptick beginning at 27 months and, at an age of 31 months, exceeds the 2014 level. VA loans do not exhibit a meaningful difference among the vintages.
Buyouts should be a consideration for Ginnie Mae investors, particularly for FHA loans. The analysis has shown that buyout rates are significantly higher for FHA loans relative to VA loans. With the CBR for FHA loans averaging 3.2x higher than the VA CBR over the last twelve months it needs to be factored into the investment equation.