Ginnie Mae EBO loan market buffeted by rising rates

The two deals involve nonperforming loans that are eligible for early buyouts (EBOs) from Ginnie Mae loan pools. The largest of the two EBO whole-loan offerings is valued at $1.1 billion. The second is a much smaller deal valued at $126.8 million. 

The seller is not identified for either deal. For all of 2021, MIAC oversaw five EBO whole loan sales valued in total at $690.4 million, according to its website deal listings.

“The mindset is that … there’s not much else out there to buy right now,” said Brendan Teeley, senior vice president of whole loan sales and trading for MIAC’s Capital Markets Group. “And given it’s Ginnie Mae, there’s a great deal of confidence that you will get paid [because the underlying loans are insured], so on a risk-weighted basis, it’s a great asset.”

Ginnie Mae makes it possible for lenders to originate qualifying mortgages that they can then securitize through the government-sponsored agency. Ginnie, however, guarantees only the principal and interest payments to purchasers of its bonds, which are sold worldwide. 

The underlying loans carry guarantees, or a mortgage insurance certification, from the housing agencies approving the loans — which include single-family mortgages backed by the Federal Housing Administration, the Department of Veterans Affairs and the U.S. Department of Agriculture. 

Teeley added that the two loan-sale deals in the pipeline in March at MIAC may be among the last to benefit from what has been a relatively good pricing market for EBO-eligible whole loan sales. 

“Historically, these [EBO nonperforming whole loan deals] have priced around mid-80s price, and there’s certainly been an uptick to the 90s [as a percentage of par] in the last year,” Teeley explained. ”In the last six or eight months, [however,] pricing has centered around par — meaning 100% of the estimated principal balance plus MSR advances.”

But that’s changing now, as the effect of sharp interest-rate jumps takes some air out of the EBO balloon. 

“… We think we’re at the end of the trade at these [pricing] levels,” Teeley added. “Pricing [on EBO loans] has already crept down to the high 90s [as a percent of par].

“… It’s really opportunistic for sellers [now] to be able to get out with a minimal haircut and get away from the [servicing] advances, and get away from the liability and servicing.”

Under Ginnie’s EBO program, a nonperforming mortgage can be acquired at par by a lender once it’s 90 days past due. If the lender can get it to reperform, typically via a modification to the terms, and it stays current for six consecutive months, the loan is eligible to be re-securitized as part of a new Ginnie Mae loan pool. 

“The benefit of this [EBO early buyout program] is that a [lender after purchasing the loan] immediately stops advancing the principal and interest each month,” explained Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors. 

Piercy added that an EBO-eligible nonperforming loan that is eventually reissued into a new Ginnie security can potentially return a comfortable profit. In the current fast rising-rate environment, however, where mortgage rates are up by at least a point since November of last year, the pricing dynamics in the EBO market have changed, according to Teeley. 

He stressed that each deal is unique, however, and pricing can vary depending on the circumstances and the parties involved. Still, the larger interest-rate dynamics now in play are creating price pressures in the market. 

“If you’re a buyer, your thought train is I can resolve this asset [a nonperforming EBO-eligible loan] better than they can [the seller], and I can do it more efficiently,” Teeley said. “But with the rising rates, there’s not much you can do in the way of a modification [on the lower-rate loans now in the pipeline] that you can deliver at a premium that also benefits the borrower.

“The economics just aren’t there [in some cases]. If something’s worth 95 cents [on the dollar] … then you [as a buyer] can’t pay par and have it work out.”

From the loan seller’s point of view, however, according to Teeley, “They may decide it’s worth selling [the loan] for a 5-point discount [95% of par] versus keeping the asset on the books languishing for a couple years.” 

There also is another benefit to weeding nonperforming EBO-eligible loans from the books, Teeley said, even if it means selling those mortgages at a slight discount.

“A lot of these EBO [whole loan] sales are done in preparation for an MSR [mortgage servicing rights] sale, to clear up the books,” Teeley said. “If you can get rid of your most delinquent and less-desirable loans, then your MSR pool is better quality. …I know we have had past Ginnie Mae loan sales that were predicated by a need to clean up the MSR books for MSR sales.”

A rising-rate environment also tends to increase the value of MSRs, which represent a small slice of the interest rate on a mortgage. As rates rise, mortgage-prepayment speeds via refinancing decrease, which expands the timeframe for MSR cash flows.

So, the MSR market is hot right now. For example, Piercy said his firm completed a dozen transactions in January involving agency MSR loan pools with a combined value of $113.2 billion, which is close to what Incenter historically has sold in an entire year. As of late February, Incenter had put out to bid at least two additional MSR deals with a combined value of $24 billion, Piercy added, and had another $40 billion worth of MSR deals in the pipeline. 

“We have not seen rates this high since May 2019,” Piercy said. “As such, we begin to see prepayment curves adjust…. This impacts origination volume negatively but provides for substantial pickup in value of the MSR asset across all vintages.”

MIAC, for its part, so far in March is marketing two MSR offerings worth a combined $2.24 billion, on the heels of a $6.23 billion MSR offering in late January and yet another in January worth $221.5 million. 

“We had the $1.94 billion bid last week, and we were able to secure an executed LOI [letter of intent], and we will have the $300 million [MSR offering] bidding [soon],” said Michael Carnes, managing director of the MSR valuations group at MIAC, referring to the two MSR deals his firm has on the table so far this month. 

“Plus, we plan to release another two offerings [as soon as] this week,” Carnes added. “And we have others waiting in the wings as both the number of trades we’re seeing, and the trading levels, have been very impressive to say the least.”