Since the programs first came online last spring, Ginnie Mae has been securitizing newly-authorized FHA jumbo loans at a faster clip than either Fannie Mae (FNM) or Freddie Mac (FRE) can package their conventional “conforming jumbo” counterparts (and HW has been following this issue, thanks to eMBS, Inc.). It’s the first time in recent memory that oft-forgotten Ginnie has been able to wrest pole position from either of the two better-known quasi-governmental agencies, and a recent report from UBS Securitized Products analysts in the past few weeks has suggested that Ginnie’s lead out of the gate reflects easier underwriting and more favorable execution in MBS markets. The FHA’s more lenient underwriting standards appear to have allowed it to overcome its historic shortcomings — a cumbersome and bureaucratic documentation process, and stiff lender requirements (for example, brokers complain that the requirement to provide costly audited financials steers all but the large mortgage brokerage firms away from FHA programs). FHA modernization proposals, which could have eased some of these obstacles, have languished over the last eight years; while subprime lenders, free from FHA’s encumbrances, consumed the Depression-era agency’s historic market position. (Congress is considering FHA modernization again this season, but thus far, it’s appearing less and less likely that a bill will be done before the July 4 break.) The new subprime, same as the old subprime With subprime lenders and securitization now essentially shut down, the FHA is the natural lender of choice for weaker-credit borrowers. As UBS points out, FHA has no minimum credit score requirement and borrowers can typically finance up to 97 percent of the purchase price of the home. For the record, so can GSE borrowers — but only subject to GSE underwriting criteria and, given limited available secondary financing, private mortgage insurance underwriting criteria. Citing a HUD mortgage letter from this past April, UBS notes that jumbo borrowers face two additional FHA requirements — a second appraisal for loans over 95 percent of value on properties in so-called declining areas, and a limit on cash-out refis at 85 percent LTV. By contrast, Freddie limits jumbo cash-out refinances on primary residences to 75 percent LTV, with a minimum credit score of 720; purchase and no-cash-out refinancings cap LTV at 90 percent. A minimum 660 credit score is required for loans under 75 percent LTV, 700 for 75 percent LTV or higher. Market perception and pricing The difference at the “cash-register” between Ginnie’s jumbo-lite pools and those offered by the GSEs has also been significant. Once Ginnie Mae clarified buyout rules for delinquent loans, the “MJM” pools tightened to 28/32s behind comparable TBA pools, said UBS analysts. More recently, production has traded as tight as 16-20 ticks back, while volume and liquidity have grown. By contrast, wholesale pricing of GSE jumbo-lites opened at 1:16 to 1:24 points in back of TBA. Not surprisingly, originators quickly responded by redirecting jumbo borrowers to FHA loans. The low GSE volumes — and the resultant criticism by consumer groups and legislators — led both GSEs to announce in May that they would price the jumbos flat to TBA (effectively “eating” the liquidity premium), and ease some credit policies as well. Freddie also announced commitments to purchase up to $15bn in jumbo-lites from Wells Fargo, JP Morgan Chase, WAMU and Citigroup. Editor’s note: Linda Lowell is a mortgage market veteran, and principal of Offstreet Research LLC. Disclosure: The author was long FRE, and held no other positions of interest, when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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