Structural Change in the Government Mortgage Market

In recent months, we have witnessed increasing attention being focused on the Government mortgage programs, particularly VA. Two issues in particular have generated considerable discussion. First, last year VA allowed its forbearance programs to expire without a backstop for distressed borrowers wishing to avoid foreclosure. Instead, VA implemented a voluntary foreclosure moratorium for their servicers, which has been extended to the end of 2024. And very recently, VA implemented a new program, the Veterans Administration Servicing Purchase Program (VASP), to help households in need, with full availability required by December 31, 2024[1].
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Second, there has been a noticeable pickup in VA prepayment speeds compared to other major programs, including FHA[2]. This is particularly evident in higher coupon securities:

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The question this raises now is: what are the implications of all this for the Ginnie Mae securitization program? There is an interesting contrast between Ginnie Mae and the GSE single security (UMBS) programs. In the latter case, investors buy a pool in the TBA market and are delivered either a Fannie Mae or Freddie Mac security. Loan characteristics (credit scores, LTV, etc.) are carefully monitored to ensure that investors have no preference for one or the other. So far, this has worked quite well, and program liquidity has been maintained.

The situation is distinctly different for Ginnie Mae pools. Here borrowers face a choice between multi-issuer and single-issuer pools. The multi-issuer pools contain loans from all the Ginnie programs, while single-issuer pools generally contain the loans of a single program. No effort is made to maintain similar loan characteristics across programs. Consequently, if new developments result in shifts in investor attitudes, we should be able to see this in changing program compositions in the new issuance data. The purpose of this note is to demonstrate this point by looking at recent issuance trends in light of the new developments in the VA program.
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We start by looking at the share of GNM issuance in the form of multi-issuance pools:

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​This share fell substantially from 92% in May 2020 in the wake of the onset of the pandemic to a recent low of 64% in March 2024, followed by a rebound to 76% last month. Below we see the evolution of single-issuer pools over the same period:

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The share of FHA single-issuer pools more than quadrupled from 4.1% in April 2023 to 17.3% 12 months later, before falling sharply to 12% in May. Since the speed differential between the FHA and VA programs was held up in May, it is tempting to think that the onset of the VASP program may have been reassuring to VA investors, but we will have to see if the correction persists. The share of VA-only pools has remained very steady, near 2% over the past two years.
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The question arises as to which institutions might be leading in the production of FHA-only pools. The results are quite interesting:

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The first table shows the ranks of the top 10 issuers of FHA-only pools, while the second shows the top 10 issuers of FHA loans in all Ginnie pools over the period Q42023-Q12024. A key takeaway is that the issuers in FHA-only pools are significantly less concentrated (top 10 13.3%) than FHA issuance overall (top 10 24.5%). About half of the members in the first table are top-10 overall FHA issuers.

There is a wide dispersion of strategies across firms. Among the top-10 issuers of FHA loans only one, Amerihome, issues more than half of these in the form of FHA-only pools. Only two other banks, Lakeview and US Bank have FHA-only pools accounting for 30% or more of its total issuance in this form. Three institutions, PennyMac, Quicken and DHI Mortgage have shares under 10%.

Two of the top 10 issuers of FHA-only pools, Data MTG Inc. and Mid America Mortgage, do over 80% of their FHA issuance in this form.

To conclude, we see that shifts in loan performance of VA loans vs FHA loans as measured by prepayment speeds can skew the composition of the Ginnie Mae market. The next logical step in this line of work would be to look into whether this spills over into liquidity across pool types. We also see a very large dispersion across firms with respect to strategies regarding the share of their FHA issuance that goes into FHA-only pools. Delving into which bank characteristics might drive different choices in this regard would also be an interesting topic for further research.

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[1]https://www.recursionco.com/blog/recursion-data-cited-by-npr-in-story-about-va-mortgage-assistance-policies
[2]https://www.msci.com/www/blog-posts/high-speeds-in-slow-lanes-a/04661696330