As the summer draws to a close, the "green shoots" of economic revival still seem to be mere seedlings, if not a little brown around the edges. The continued sluggishness in the capital markets has been compounded by the relative inactivity of warehouse lenders in extending credit for the funding of mortgage origination. For the most part, warehousing credit continues to be bottlenecked and, of the lenders still in the business, many remain wary about the proper valuation of mortgage loan collateral.
One bright spot has been the origination of Ginnie Mae-, Fannie Mae- and Freddie Mac-eligible mortgages, the issuance of mortgage-backed securities guaranteed by the government-sponsored enterprises and an increased level of related activity in the warehouse lending market. Originators have expanded, or in some cases, shifted, their focus to mortgages that meet the selling and servicing criteria promulgated by the GSEs as demand for GSE MBS has surged over the past year.
Notably, the issuance of Ginnie Mae-guaranteed MBS, backed primarily by single-family mortgages, has been consistently trending upward for over a year and at record levels for the past few months. The volume of Ginnie Mae MBS issuance in the first six months of 2009 ($207 billion) almost doubled the issuance in the first six months of 2008 ($107 billion). By way of comparison, volumes of private-label MBS issuance in the first half of 2009 declined 38.9% from the first half of 2008.
This trend is primarily attributed to the perceived safety and liquidity of the securities and the underlying mortgages, all of which can be traced to the indirect and direct role the federal government plays in these products.
These securities are guaranteed by the applicable GSE as to timely payment of principal and interest to investors regardless of whether the underlying borrowers are current on their monthly payments. This guarantee is backed by the full faith and credit of the U.S. government, with the result that these securities offer investors credit quality similar to that of U.S. Treasuries. Additionally, the mortgages underlying Ginnie Mae MBS are required to be insured or guaranteed through certain federal instrumentalities, such as the Federal Housing Administration and the Department of Veterans Affairs.
Additionally, federal bailout programs have made the origination and aggregation of GSE mortgages more attractive to lenders. Both the Federal Reserve Bank of New York and the Treasury Department have implemented programs to purchase new-issue GSE MBS on the open market for the purposes of increasing liquidity, promoting stability in the financial markets and supporting the housing market by making mortgages more available and affordable. From the inception of the New York Fed's program in January through the second week of July 2009, over $660 billion had been deployed to purchase GSE MBS.
Finally, recent legislation has increased the availability of GSE mortgages to homeowners in a time when mortgages are generally difficult to secure. The American Recovery and Reinvestment Act temporarily raised the maximum FHA and GSE loan limits to $729,750 for mortgages originated in 2009 in certain high-cost areas and provided the secretary of HUD and the director of the Federal Housing Finance Authority with the discretion to set higher FHA and GSE loan limits in certain sub-areas. In fact, 35.9% of applications made for mortgages in June 2009 consist of applications for FHA and VA mortgages, the highest level since late 1990.
Mortgage origination and MBS issuance go hand in hand with warehouse lending, since it provides borrowers with the pipeline of liquidity with which to originate and aggregate mortgages over a period of time for securitization at a later date. The resurgence of origination and securitization of GSE-eligible mortgages has been facilitated in large part by "gestation repo," a highly specialized lending structure that is collateralized by these products and has been utilized in certain market niches for decades.
Though the limited popularity of this kind of facility waned in recent years as GSE mortgages lost market share to alt-A, subprime mortgages and other nonconforming loan products, it is now one of the only active segments of the warehouse lending market. Lenders have taken a shine to these facilities because the collateral can be easily sold to or securitized by the GSEs and, when structured properly, protect the lender against the bankruptcy and credit risk of the borrowing counterparty.
This past year the federal government, through its many agencies and instrumentalities, has provided the mortgage market with an unprecedented number of emergency programs and channeled trillions of dollars into the system, all in an effort to resuscitate the credit markets. Whether or not intentional, the convergence of these programs with the existing implicit government guarantee underlying GSE mortgages has resulted in the surge of GSE mortgage origination, lending and securitization activity we are seeing right now.
