New Security Program for GNMA

Mortgage Wire

January 15, 2004

Ginnie Mae is planning to launch a new securitization program this summer that will eventually allow lenders to sell their excess servicing on new and existing Ginnie Mae mortgage-backed securities.

First, Ginnie Mae is going to launch a program to guarantee interest-only and principal-only strips in July.

Once the IO/PO program is in place, it will set up a market for excess servicing, which is expected to trade and act like IO strips, according to Ginnie Mae vice president Ted Foster.

"We are going to securitize excess servicing for the lenders, starting in September or October," the director of Ginnie Mae's MBS program said.

Ginnie Mae issuers are required to retain 44 basis points for servicing fees on Ginnie Mae I mortgage-backed securities and 19 bp on Ginnie Mae II MBS. The agency reduced the minimum servicing fee for Ginnie IIs on July 1, 2003.

However, most lenders end up holding much more than that. On the old Ginnie Mae IIs, issuers generally retain 60 bp in servicing and on the new Ginnie IIs they are still carrying 40-42 bp of servicing.

Servicing rights are volatile assets to hold. They tie up capital and require hedging. The new IO securitization program will free up capital for lending, Mr. Foster said.

Fannie Mae has a program for securitizing excess servicing, but Freddie Mac does not. This new Ginnie Mae program will give "originators more flexibility in how they securitize loans and how they hold servicing," one Ginnie Mae issuer said who did not want to be identified.

"It is another step in bringing Ginnie Mae up to the level of the other agencies," the issuer added.

Ginnie Mae president Ronald Rosenfeld announced the decision to offer the new products at a Dec. 17 anniversary party for the U.S. government agency.

Ginnie Mae has guaranteed over $2 trillion in MBS since it was created 35 years ago. In fact, Ginnie Mae issued the first MBS.

In fiscal year 2003, Ginnie Mae guaranteed $215.8 billion in securities backed by the Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service loans.

However, Ginnie Mae has been very conservative for several decades. Fannie Mae and Freddie Mac have guaranteed IO and PO strips since the late 1980s.

The IO/PO program is expected to benefit Wall Street underwriters and give them more flexibility in putting together Ginnie Mae REMICs.

Servicers may want to purchase Ginnie Mae POs to hedge their servicing portfolios. And investors in Ginnie MBS may purchase IO/POs to speculate on prepayment rates and earn a positive carry.

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