Lots of Data Crammed into a Holiday-Shortened Week

(Continued from Prior Part)

Ginnie Mae and the TBA market

The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. When a mortgage banker makes a VA (Veterans Affairs) or FHA (Federal Housing Authority) loan, that loan is securitized and put into a Ginnie Mae TBA.

The biggest difference between a Fannie Mae MBS (mortgage-backed security) and a Ginnie Mae MBS is that Ginnie Mae has an explicit guarantee from the federal government. Fannie Mae doesn’t have a guarantee like that. As a result, a Ginnie Mae MBS trades at a premium compared to a Fannie Mae TBA.

Ginnie Mae TBAs ignore the machinations of the bond market

The ten-year bond yield, tradeable through the iShares 20+ Year Treasury Bond ETF (TLT), rose by 7 basis points for the week ending December 18, 2015. Ginnie Mae TBAs were flat at 104 9/32. Mortgage REITs are big users of TBAs because they can raise or lower exposure very quickly. While older MBS issues can become illiquid, there’s always a large liquid market in TBAs.

Implications for mortgage REITs

Mortgage REITs like Annaly Capital Management (NLY), MFA Financial (MFA), and American Capital Agency (AGNC) are big holders of Ginnie Mae TBAs. In the fourth quarter, American Capital Agency moved the coupon down aggressively in its TBA portfolio. This move accounts for some of the underperformance of the higher coupon TBAs. The rate of prepayments is driving these trades. Additionally, non-agency REITs like Two Harbors Investment (TWO) aren’t big TBA holders.

Investors interested in trading in the mortgage REIT sector through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).

Browse this series on Market Realist:

• Part 1 - Week Ahead: GDP and Inflation Data

• Part 2 - Week in Review: Fed Hikes the Rates

• Part 3 - Bond Yields Fell after the FOMC Meeting, Rose for the Week