The Federal Housing Administration‘s recently announced plans to tighten its standards for approving lenders will increase prepayment risks for investors who own Ginnie Mae-backed securities, say analysts at Barclays Capital (BC).
The agency’s plans to eliminate the consderation of a lender’s compare ratio when deciding whether to streamline-refinance its loans will accelerate refinancing activity, they say, causing higher prepayment speeds, and, in turn, reduce investor profits.
The compare ratio is the serious delinquency rate of all loans originated by a lender during a two-year period relative to the average of all lenders operating in the same region. Higher coupon and seasoned loans have a weaker credit and greater default risks, therefore, streamline-refinancing them could lift ratio passed 150%. And if it does, the lender could lose the ability to originate FHA-backed loans.
The change is part of a larger attempt by the FHA to protect its Mutual Mortgage Insurance Fund, which many say is in danger of requiring a multibillion dollar government bailout.
Disregarding a lender’s compare ratio calculation creates an incentive for streamline-refinancing higher-risk borrowers, analysts say. This will speed up Ginnie Mae prepayments, particularly on higher coupons and pre-2009 originations since these have the worst credit quality.
“That said, we expect the effect on speeds to be modest,” they say. “We believe that this plan will be implemented and has the potential to raise GNMA speeds by a few CPR.”
The effect should be even less for pre-2010 vintages because their much better credit quality suggests they have not been constrained by the compare ratios.
Data from the Department of Housing and Urban Development suggest that the compare ratios of most national lenders are now significantly below the 150% threshold.
In December, HUD Secretary Shaun Donovan, said as a result of an October analysis by an independent actuary of FHA’s insurance fund, HUD plans to announce how it will address premium prices in its fiscal year 2013 budget proposal.
Since then, Congress has enacted a 10 basis-point increase to the FHA annual mortgage-insurance-premium, and President Barack Obama has called on the FHA to shoulder a larger role in helping responsible home owners and the housing market.
“Given the circumstances, we think more changes to the FHA program could be in the works, and since the budgetary proposal should be released over the next few weeks, the timing is peculiar,” they said. “Therefore, Ginnie Mae faces heightened risks in the near term.”
