By Paul Raebel, Managing Director, MDS – Loan Sales and Delivery
Delivery and Pricing
Beginning on February 1st, 2021, Ginnie Mae instituted new requirements for how re-performing loans must be pooled. These new pools are referred to as C RG pools and consist entirely of loans that have been bought out of Ginnie Mae pools.
What is a re-performing loan? Simply put, Ginnie Mae defines a re-performing loan as a loan that was bought out of a Ginnie Mae pool, is not more than 30 days delinquent, and hasn’t been modified (i.e., the current rate and terms are unchanged from the time the loan was originally sold to Ginnie Mae).
If a loan meets this definition of a re-performing loan (See Ginnie Mae MBS Guide, Chapter 18 for more detail), there are a few other criteria that need to be met to qualify for inclusion in a C RG pool. One requirement is that the loan entered a “COVID-era” forbearance. That is, it must have entered forbearance on or after March 1, 2020, and it must have been bought out of the pool on or after July 1, 2020. Finally, the loan must have made Timely Payments (defined by GNMA as a full monthly payment made no more than 30 calendar days after its scheduled due date) and the Issue Date of the new pool must be at least 120 days from the loans most recent delinquency. In other words, the loan must have been current for at least 4 months. As discussed below, this re-performance requirement has an important impact on subsequent credit and prepayment performance.
What other requirements are there for the loans that make up C RG pools? All of the loans in a C RG pool must fall within the standard Custom pool requirements. These Custom pool requirements include: the UPB must be at least $1,000,000, the interest rates on the pooled loans must be at least 25 basis points but not more than 75 basis points above the pass-thru rate (i.e. coupon) on the securities, the buydown % must be less than 10% of the pool, the % of high-balance loans cannot exceed 10%, at least 90% of the loans in the pool must have homogenous terms (i.e. short term loans in a long term pool must account for less than 10% of the original UPB) and at least 80% of the loans in the pool must have a maturity date that’s within 30 months of the latest maturity date in the pool.
After a pool made up of loans that meet all of these requirements has been assembled, there are a few final requirements to ensure a successful delivery with Ginnie Mae. All of the loans must be identified with a loan purpose code of “5” for Re-Performing Loans and the RG Certification Flag must have a value of ‘Y’ on the GinnieNET import file.
Meeting and verifying these pooling and delivery requirements can be significantly more challenging and time-consuming than many originators are used to. However, the effort is certainly worthwhile as RG pools can trade at a significant premium to TBA. These pricing premia can exceed 2+ points for higher coupons. For further information about our Mortgage Delivery and Due Diligence Services, please visit our website or contact your MIAC Sales Representative.
Performance
Re-performing GNMA loans have lower monthly voluntary prepayments than otherwise similar GNMA loans which are always current. Within FHA, monthly prepayment rates are about 40% lower than always current loans – after adjusting for collateral characteristics such as LTV, UPB, state, and other prepayment drivers. However, this % prepayment reduction itself varies significantly by refinance incentive. The impact on in-the-money loans is much larger than the impact on out-of-the-money loans. This is perhaps initially surprising given the flexibility embedded in the FHA streamlined refinance program. However, it should be kept in mind that a significant fraction of FHA refinances are “FHA-to-Conventional”, where the streamline requirements are not applicable. Within VA, the impact of prior delinquency on voluntary prepays is a much smaller 25%. This is unsurprising since “VA-to-Conventional” refinances are much less common than “FHA-to-Conventional” refis. And similar to the FHA evidence cited above, the impact of prior delinquency is greater for loans which are in the money.
The above effects concern monthly prepayment rates or the direct effect of re-performing status on prepayments. But for long-term prepayment projections (such as average life equivalent VPR), there is also an indirect effect at play. In particular, re-performing loans (i.e., blemished currents) are much more likely to migrate back to D30 and worse. And when they do, monthly prepayments from these delinquent states drop dramatically. This interplay between credit transitions and voluntary prepayments underscores the need to jointly model these outcomes in a competing risk framework.
The twin effects of re-performing status on prepayments and credit on pool-level terminations go in opposite directions. Voluntary prepayments decline and also become less rate-sensitive, which lowers both average prepayment rates and convexity costs. However, buyouts will be higher due to the elevated re-default rates on re-performing collateral.
RG pool pricing is indicating that the prepayment effect generally dominates the credit/buyout effect so that total pool-level terminations are lower for RG pools. This is also consistent with analysis using our internal models. As we have discussed in prior webinars, the importance of payment history on credit and prepayment behavior is an important distinguishing feature of MIAC’s CORE™ family of residential models.
GNMA RG Pools: Delivery, Pricing, and Performance
Author
Paul Raebel, Managing Director, MDS – Loan Sales and Delivery
Paul.Raebel@miacanalytics.com
View MIAC Perspectives – Summer 2021 Issue
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