Mortgages, Ginnie Mae &
the TBA Market
Ted Tozer
Real Estate Broker Conference
August 8, 2013
0
Ginnie Mae Overview: Who We Are
• Government National Mortgage Association (GNMA or Ginnie Mae)
• Established as a corporation within HUD by the Housing & Urban
Development Act of 1968*
• Effectively split from Fannie Mae, which was created in 1938 in
response to the Great Depression
• Mission is to expand affordable housing by linking global capital
markets to the U.S. housing finance markets
*HUD Act [12 USC § 1716b]
1
Ginnie Mae Overview: What We Do
• Guarantee Mortgage-Backed Securities (MBS), which raise funding
for virtually all loans insured or guaranteed by U.S. Government
agencies (FHA, VA & USDA Rural Housing)
– Ginnie Mae does not originate loans or issue MBS
– Private lending institutions issue MBS
• Facilitate the financing of a variety of products:
– Single-family: forward & reverse mortgages, manufactured homes
– Multifamily: construction & permanent loans, hospitals, nursing homes,
assisted living facilities
• Over $1.4 trillion in outstanding MBS guaranteed
– FHA loans back about 75% of outstanding MBS
• In 2012 about half of all purchase mortgages were financed through
Ginnie Mae MBS
2
Ginnie Mae MBS Outstanding Relative to GSEs
MBS outstanding in billions
$3,000
May 2013: $2,763B
$2,500
$2,000
May 2013: $1,601B
Ginnie Mae
$1,500
Freddie Mac
$1,000
May 2013: $1,406B
Fannie Mae
$500
$0
Sources: Fannie Mae and Freddie Mac Monthly Reports; Ginnie Mae data includes HECMs
3
U.S. Mortgage Market
• U.S. mortgage market is comprised of two segments:
– Primary market is made up of the borrower and lender/Issuer
– Secondary market is made up of the lender/Issuer and investor
• The secondary market enables lenders to sell the loans they
originate to a third party
– Lenders transfer loans off balance sheet & transfer risk that borrower will default
– Lenders transfer risk that interest rates will rise to investors
– Lenders use proceeds to make new mortgage loans available
4
TBA Market Overview
•
To-Be-Announced (TBA) market was created in 1970s to support Ginnie
Mae securitization & financing of government insured loans
–
Virtually all government insured mortgages are sold into the TBA market – sold
as part of MBS guaranteed by Ginnie Mae, Fannie Mae & Freddie Mac
•
Facilitates forward trading of mortgages (delivery can take over three
months, on average takes two months)
•
Enables lenders to lock in rate for loan originations prior to actually
originating loans
•
Most liquid & important secondary mortgage market
•
System provides broad & stable capital availability for potential homebuyers
throughout the U.S.
•
TBA securities have U.S. Government guaranty, which facilitates scale of
market & fungibility of securities
5
TBA Volume Traded Daily
2012 Average Daily Trading Volume in Billions
$600
$518.9
$500
$400
$280.4
$300
$200
$100
$4.5
$16.7
$0
Treasury
TBA (Agency MBS)
Non-Agency MBS
Corporate Debt
6
Stylized TBA Transaction Example – Day 1
Sun.
9PM
Mon.
9AM
• U.S. Dealer Bank sells $100 million of Ginnie Mae or GSE
MBS with 4% coupon rate to Asian investors
• Mortgage Banker shorts (promises to deliver) $100 million of
4% MBS to Dealer Bank locking in rate for loan originations
• Throughout day, Mortgage Banker’s loan originators across
the U.S. make loans at 4% to fill position
Monday
Bus. Hrs.
7
Stylized TBA Transaction Example – Day 2 thru
Settlement, 13 weeks later
Day 2 up to
48 hrs. to
Settlement
At most
48 hrs. to
Settlement
48 hrs. to
Settlement
Settlement
Date
• Mortgage Banker has ability to fine tune trade, e.g., sell excess loan
production or buy shortfall in TBA market
• Mortgage Banker sells loans to GSE or delivers loans to Ginnie Mae
for pool processing in exchange for guaranteed MBS
• Mortgage Banker must provide specific MBS pool information to
Dealer Bank at this point
• Mortgage Banker delivers MBS to Dealer Bank, Dealer Bank delivers
MBS to investors
8
FHA Loan in the Securitization Process
60-90 days
Borrower finds home
they’d like to buy
Borrower goes to
FHA-approved lender
to obtain mortgage
Lender had already
pre-sold the mortgage &
locked in a rate; See slide
7, “Mon. 9AM”
Borrower’s application
is processed &
mortgage closes
Once mortgage is closed & delivered,
servicing of the loan begins
Lender pools loan & delivers MBS
to investors; See slide 8,
“Settlement Date”
Borrower makes monthly
payment to lender/servicer who
forwards it to investors
9
Securitization Bifurcates Risk
Credit Enhancer & Issuer
Lender’s Inherent Risks
Credit Risk
&
Interest Rate Risk
MBS Investor
10
Government Exposure to Mortgages
• The U.S. Government has had a significant role in the mortgage market
going back at least 30 years
11
Our Guaranty Matters – it Provides Safety & Liquidity
•
Ginnie Mae provides a U.S. Government guaranty on the monthly payment of
MBS to investors
•
Government guaranty qualifies mortgages for the TBA market & attracts capital
from throughout the world to invest in U.S. mortgages
•
Guaranty makes investment in U.S.-backed mortgages exceptionally safe &
provides liquidity to them
•
Guaranty assures investors they will get paid regardless of loan performance
or servicer performance
•
Guaranty homogenizes mortgages & lender/servicers so they are
indistinguishable to investors
•
Homogenization of mortgages & lender/servicers enables investment in
enormous blocks of mortgages
– $280.4 billion in daily TBA MBS trading in 2012
– TBA market would not exist without government guaranteed MBS
12
Scope of Mortgage Market & Government Involvement
• Total U.S. outstanding mortgage debt is currently at almost
$10 trillion
– Outstanding mortgage debt is roughly equivalent to total value of assets
on banks’ balance sheets
– In 2012, only about 10% of mortgages were kept on banks’ balance
sheets
– If all banks did was invest in mortgage loans, they would barely be able
to fund all mortgages in market, i.e., banks would not fund auto loans,
credit card loans, etc.
• Government-backed securitization is necessary to maintain current
volume available & preserve the 30-year fixed rate mortgage
13