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Mortgages, Ginnie Mae & the TBA Market

Ted TozerReal Estate Broker Conference

August 8, 2013

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Ginnie Mae Overview: Who We Are

• Government National Mortgage Association (GNMA or Ginnie Mae)

• Established as a corporation within HUD by the Housing & Urban Development Act of 1968*

• Effectively split from Fannie Mae, which was created in 1938 in response to the Great Depression

• Mission is to expand affordable housing by linking global capital markets to the U.S. housing finance markets

*HUD Act [12 USC § 1716b]

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Ginnie Mae Overview: What We Do

• Guarantee Mortgage-Backed Securities (MBS), which raise funding for virtually all loans insured or guaranteed by U.S. Government agencies (FHA, VA & USDA Rural Housing)– Ginnie Mae does not originate loans or issue MBS– Private lending institutions issue MBS

• Facilitate the financing of a variety of products:– Single-family: forward & reverse mortgages, manufactured homes– Multifamily: construction & permanent loans, hospitals, nursing homes,

assisted living facilities

• Over $1.4 trillion in outstanding MBS guaranteed – FHA loans back about 75% of outstanding MBS

• In 2012 about half of all purchase mortgages were financed through Ginnie Mae MBS

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Ginnie Mae MBS Outstanding Relative to GSEsMBS outstanding in billions

Sources: Fannie Mae and Freddie Mac Monthly Reports; Ginnie Mae data includes HECMs

May 2013: $2,763B

May 2013: $1,406B

May 2013: $1,601B

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U.S. Mortgage Market

• U.S. mortgage market is comprised of two segments:– Primary market is made up of the borrower and lender/Issuer– Secondary market is made up of the lender/Issuer and investor

• The secondary market enables lenders to sell the loans they originate to a third party

– Lenders transfer loans off balance sheet & transfer risk that borrower will default – Lenders transfer risk that interest rates will rise to investors– Lenders use proceeds to make new mortgage loans available 

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TBA Market Overview

• To-Be-Announced (TBA) market was created in 1970s to support Ginnie Mae securitization & financing of government insured loans– Virtually all government insured mortgages are sold into the TBA market – sold

as part of MBS guaranteed by Ginnie Mae, Fannie Mae & Freddie Mac

• Facilitates forward trading of mortgages (delivery can take over three months, on average takes two months)

• Enables lenders to lock in rate for loan originations prior to actually originating loans

• Most liquid & important secondary mortgage market

• System provides broad & stable capital availability for potential homebuyers throughout the U.S.

• TBA securities have U.S. Government guaranty, which facilitates scale of market & fungibility of securities

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TBA Volume Traded Daily

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Stylized TBA Transaction Example – Day 1

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Stylized TBA Transaction Example – Day 2 thru Settlement, 13 weeks later

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FHA Loan in the Securitization Process

Borrower finds home they’d like to

buy

Lender pools loan & delivers MBS to investors; See slide 8,

“Settlement Date”

Lender had already pre-sold the mortgage &

locked in a rate; See slide 7, “Mon. 9AM”

Borrower goes to FHA-approved lender

to obtain mortgage

Borrower’s application is processed &

mortgage closes

Borrower makes monthly payment to lender/servicer who

forwards it to investors

60-90 days

Once mortgage is closed & delivered, servicing of the loan begins

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Interest Rate Risk

Credit Risk

&

Credit Enhancer & Issuer

MBS Investor

Securitization Bifurcates Risk

Lender’s Inherent RisksCredit Risk

Interest Rate Risk

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Government Exposure to Mortgages

• The U.S. Government has had a significant role in the mortgage market going back at least 30 years

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Our Guaranty Matters – it Provides Safety & Liquidity

• Ginnie Mae provides a U.S. Government guaranty on the monthly payment of MBS to investors

• Government guaranty qualifies mortgages for the TBA market & attracts capital from throughout the world to invest in U.S. mortgages

• Guaranty makes investment in U.S.-backed mortgages exceptionally safe & provides liquidity to them

• Guaranty assures investors they will get paid regardless of loan performance or servicer performance

• Guaranty homogenizes mortgages & lender/servicers so they are indistinguishable to investors

• Homogenization of mortgages & lender/servicers enables investment in enormous blocks of mortgages

– $280.4 billion in daily TBA MBS trading in 2012– TBA market would not exist without government guaranteed MBS

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Scope of Mortgage Market & Government Involvement

• Total U.S. outstanding mortgage debt is currently at almost $10 trillion – Outstanding mortgage debt is roughly equivalent to total value of assets

on banks’ balance sheets

– In 2012, only about 10% of mortgages were kept on banks’ balance sheets

– If all banks did was invest in mortgage loans, they would barely be able to fund all mortgages in market, i.e., banks would not fund auto loans, credit card loans, etc.

• Government-backed securitization is necessary to maintain current volume available & preserve the 30-year fixed rate mortgage