The Government National Mortgage Association has long been considered a piker compared to Fannie Mae and Freddie Mac. But Ginnie Mae's tertiary status in the secondary market could soon change.
The agency and others are predicting that Ginnie could surpass Freddie in outstanding mortgage backed securities in the next nine to 12 months.
"We are projecting in the next 12 months, our outstanding securities should exceed Freddie's outstanding balances," says Ginnie Mae president Ted Tozer.
Some Wall Street analysts have told his agency that "it could happen even sooner, maybe as early as nine months from now."
One reason is the shift in the originations market away from refinancing, in favor of loans for home purchases.
"The purchase share within the Ginnie market is higher than the purchase share within the Freddie market," says Laurie Goodman, a senior fellow at the Urban Institute.
Freddie is the second-largest of the secondary marketing agencies, with $1.63 trillion in outstanding MBS, compared to $1.5 trillion in outstanding Ginnie MBS. Fannie Mae is the top dog with $2.76 trillion in outstanding MBS.
Four years ago, Ginnie Mae had just $1 trillion in outstanding MBS, compared to $1.73 trillion in Freddie MBS.
The agency's subsequent growth "shows how well the [Ginnie Mae] program has worked in attracting capital to support the housing industry," Tozer says.
Lisa Gagnon, a spokeswoman for Freddie, says the GSE "is maintaining a competitive presence in the single-family mortgage market and working to expand it prudently and responsibly. Our goal is to continue to provide liquidity, streamline processes and bring more certainty and transparency to the market so our lender customers of all sizes can help more families buy homes they can afford to keep."
Freddie's growth has been hampered by poor pricing and liquidity for its securities. For a number of esoteric reasons, investors treat Freddie's MBS, which Freddie calls "participation certificates," or PCs, as lower grade bonds that those guaranteed by Fannie Mae.
Freddie had strong MBS issuance during the recent refinancing boom. But lenders were essentially refinancing existing Freddie loans, which wasn't additive to the GSE's MBS book of business.
Ginnie Mae, on the other hand, was gradually increasing its MBS portfolio through the securitization of new Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service guaranteed loans.
Now that Home Affordable Refinancing Program originations have slowed, Freddie's issuance of new MBS has fallen slightly below Ginnie's monthly volume.
Ginnie's growth has also been hampered by the drop in FHA originations over the past year due to large increases in FHA insurance premiums. (Ginnie guarantees timely payment of interest and principal on securities backed by loans that are in turn guaranteed by FHA and other agencies.)
However, Ginnie Mae issuance has been aided by a pickup in VA-guaranteed loans. Currently, VA loans make up nearly 40% of Ginnie Mae pools, compared to 20% just two year ago.
"Borrower reliance on explicit government insurance and guarantees through FHA, VA and RHS has experienced the fastest growth, and FHA has been the primary source of credit for borrowers with less than pristine credit," Goodman wrote in a recent blog post.
The former Wall Street analyst estimates that Freddie has $1.5 trillion in single-family PCs and Ginnie has $1.4 trillion in single-family MBS.
Moving up to second place won't necessarily be a cake walk for Ginnie.
There has been dramatic improvement in the pricing and liquidity of Freddie securities in the past year, according Credit Suisse mortgage strategist Mahesh Swaminathan.
The spread between Freddie and Fannie securities has narrowed by almost 50% over that period, he says.
This improvement comes from the alignment of Fannie and Freddie practices which the Federal Housing Finance Agency has been pushing.
The pricing of Freddie bonds also got a boost when new FHFA director Mel Watt came out "forcefully" for creating a common Fannie/Freddie mortgage security, Swaminathan says.
"Moving toward a single common security will improve liquidity in the housing finance markets," Watt said in first his major speech as the GSE regulator, delivered on May 13. "It would also reduce costs to the enterprises, particularly Freddie Mac, since Freddie's securities have historically traded at a disadvantage to Fannie Mae."
This pronouncement has convinced investors the Freddie bonds will eventually be convertible into a Fannie MBS or a new common mortgage security. But it may take several few years before this conversion is possible.