Ginnie Mae Securities Underperform Fannies Again
Real Estate Review and Preview: Late May Investor Must-Knows
Ginnie Mae and the to-be-announced market
The Fannie Mae TBA (to-be-announced) market represents the usual conforming loan, the plain Fannie Mae or Freddie Mac 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go, such as the FHA (Federal Housing Administration) and Veterans Affairs loans.
The biggest difference between a Fannie Mae MBS (mortgage-backed security) and a Ginnie Mae MBS is that Ginnies have an explicit guarantee from the federal government. Fannies don’t have a guarantee, just a “wink-wink, nudge-nudge” guarantee. As a result, a Ginnie Mae MBS trades at a premium compared to a Fannie Mae TBA.
Ginnie Mae TBAs underperform bonds and Fannie TBAs
The ten-year bond yield rose 7 basis points last week. Ginnie Mae TBAs gave up 20 ticks, while Fannie Mae TBAs only gave up 14 ticks. After a period of outperformance, Ginnies are now underperforming Fannies again.
American Capital Agency discussed the changes in mortgage insurance premiums on its earnings conference call. Ordinarily, it doesn’t buy Ginnie Mae TBAs. However, these securities sold off significantly on the changes to mortgage insurance premiums. This is one reason why Ginnie Mae TBAs have been outperforming Fannie Mae TBAs. That being said, AGNC has been unwinding its position in Ginnie Mae TBAs, and that change could account for the underperformance.
Mortgage REITs are big users of TBAs since they can increase or decrease 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 such as 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 down aggressively in coupon in its TBA portfolio. This move accounts for some of the underperformance of the higher-coupon TBAs. Prepayment speeds are driving these trades. Non-agency REITs like Two Harbors (TWO) aren’t big TBA holders.
Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Fund (REM). Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).
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