Ginnie Mae EBO loan market rocked by rising rates
The two operations relate to non-performing loans eligible for early redemption (EBO) of ginnie mae loan pools. The larger of EBO’s two global loan offers is valued at $1.1 billion. The second is a much smaller transaction valued at $126.8 million.
The seller is not identified for either transaction. For all of 2021, MIAC oversaw five EBO whole loan sales worth a total of $690.4 million, according to its transaction listings on its website.
“The mindset is that there’s not much else to buy right now,” said Brendan Teeley, senior vice president of loan sales and trading for the MIAC Capital Markets. “And given that it’s Ginnie Mae, there’s great confidence that you’ll get paid [because the underlying loans are insured]so on a risk-weighted basis, it’s a great asset.
Ginnie Mae allows lenders to create qualifying mortgages which they can then securitize through the government-sponsored agency. Ginnie, however, only guarantees payment of principal and interest to buyers of its bonds, which are sold around the world.
The underlying loans are backed by guarantees, or proof of mortgage insurance, from the real estate agencies approving the loans — which include single-family mortgages guaranteed by the Federal Housing Administrationthe Department of Veterans Affairs and the United States Department of Agriculture.
Teeley added that the two loan sales deals underway in March at MIAC may be among the last to benefit from what has been a relatively good price market for OBO-eligible whole loan sales.
“Historically, these [EBO nonperforming whole loan deals] are priced around the mid-80s price, and there was definitely a slight uptick through the 90s [as a percentage of par] over the past year,” Teeley explained. “Over the past six or eight months, [however,] pricing centered around par, i.e. 100% of the estimated principal balance plus MSR advances.
But that is changing as the effect of sharp interest rate hikes takes some air in the EBO balloon.
“…We think we are at the end of the trade at these [pricing] levels,” added Teeley. “Pricing [on EBO loans] has already reached the 90s [as a percent of par].
“…It’s really opportunistic for sellers [now] be able to go out with a minimal haircut and get away from the [servicing] advances and moving away from responsibility and maintenance.
Under Ginnie’s EBO program, a non-performing mortgage can be acquired at par by a lender once it is 90 days past due. If the lender can get it back, usually through a change in terms, and it stays current for six consecutive monthsthe loan can be resecuritized as part of a new Ginnie Mae loan pool.
“The advantage of this [EBO early buyout program] Is it a [lender after purchasing the loan] immediately stop advancing principal and interest each month,” said Tom Piercy, Denver’s general manager. Incenter Mortgage Advisors.
Piercy added that an OBO-eligible non-performing loan that is eventually reissued into a new Ginnie title can potentially earn a comfortable profit. However, in the current rapidly rising rate environment, where mortgage rates have risen at least one point since November last year, the price dynamics in the EBO market have changed, according to Teeley.
He stressed, however, that each deal is unique and prices may vary depending on the circumstances and the parties involved. Yet the broader interest rate dynamics currently in play are creating price pressures in the market.
“If you’re a buyer, your train of thought is I can solve this asset [a nonperforming EBO-eligible loan] better than they can [the seller], and I can do it more efficiently,” Teeley said. “But with the rate going up, there’s not much you can do in terms of changing [on the lower-rate loans now in the pipeline] that you can offer at a great price that also benefits the borrower.
“The economy just isn’t there [in some cases]. If something’s worth 95 cents [on the dollar] … so you [as a buyer] can’t pay parity and make it work.
From the loan seller’s perspective, however, according to Teeley, “They may decide it’s worth selling [the loan] for a discount of 5 points [95% of par] instead of keeping the asset on the books languishing for a few years.
There’s also another benefit to getting OBO-eligible non-performing loans off the books, Teeley said, even if it means selling those mortgages at a slight discount.
“A lot of these EBOs [whole loan] sales are made in preparation for an MSR [mortgage servicing rights] sale, to clean the books,” Teeley said. “If you can get rid of your most delinquent and less desirable loans, your MSR pool is better. … I know we’ve had past Ginnie Mae loan sales that were predicated on cleaning the books. MSR for MSR sales.
A rising rate environment also tends to increase the value of MSRs, which represent a small slice of the interest rate on a mortgage. As rates rise, mortgage prepayment times via refinance decrease, which lengthens the MSR cash flow lag.
So, the MSR market is hot right now. For example, Piercy said his firm closed a dozen deals in January involving agency MSR loan pools worth a combined $113.2 billion, which is close to what Incenter sold. historically in an entire year. By late February, Incenter had offered at least two additional MSR deals worth a combined $24 billion, Piercy added, and had another $40 billion worth of MSR deals in the works.
“We haven’t seen rates this high since May 2019,” Piercy said. “As such, we are starting to see the prepayment curves adjust…. This has a negative impact on origination volume, but allows for a substantial increase in the value of the MSR asset across all vintages.
MIAC, for its part, is marketing two MSR offerings so far in March with a combined value of $2.24 billion, following an MSR offering of $6.23 billion at the end of January and another in January of a worth $221.5 million.
“We had the $1.94 billion offer last week and we were able to get a letter of intent executed [letter of intent]and we will have the 300 million dollars [MSR offering] bid [soon]said Michael Carnes, managing director of the MSR Valuations Group at MIAC, referring to the two MSR deals his company has on the table so far this month.
“In addition, we plan to release two more offers [as soon as] this week,” Carnes added. “And we have more waiting in the wings, because the number of trades we’re seeing and the trading levels have been very impressive to say the least.”