A proposal by some in the mortgage industry to change the way certain Ginnie Mae securities are structured-as a way of possibly bringing down loan rates-appears to have lost key Wall Street support.
Fearing potentially negative impacts to the securities market, the PSA Bond Market Trade Association, which represents mortgage securities brokers and traders, last week backed away from a measure that's being promoted by the Mortgage Bankers Association.
The MBA wants Ginnie Mae-the Government National Mortgage Association - to change its rules and classify more loans as a type of security that, because of its relatively predictable prepayment rates, currently trades easily on Wall Street.
Industry observers said the PSA's reluctance to back the measure will make it a difficult sell. But the MBA is undeterred.
The PSA's position "is unfortunate," said MBA executive director Phyllis Slesinger. "But the benefit to the borrower is too important not to proceed."
A letter outlining the MBA's request could go to Ginnie Mae's president, Kevin Chavers, this week, Ms. Slesinger said.
The MBA wants to add Ginnie Mae II loans to the relatively stable Ginnie Mae I pools. The Ginnie Mae II loans are more volatile and therefore require additional yields to compensate securities investors for risks. The rates on loans that are now classified as Ginnie Mae II securities could fall if they were part of the Ginnie Mae I pools, Ms. Slesinger said.
The PSA, after working with the MBA through a joint task force, is not convinced the move would be good for the market, said executives close to the PSA.
The PSA believes that the addition of more-volatile loans would disrupt the way Ginnie Mae I securities now trade, the executives said.
Following a phone call with the MBA last week, the PSA began drafting a letter to the MBA detailing its reservations, a PSA spokesman said. The spokesman declined to confirm a report that the PSA would also send a letter to Ginnie Mae objecting to the proposal.
Ms. Slesinger said that during discussions with the PSA, the MBA made a number of amendments to make its proposal more palatable to Wall Street. To reduce volatility, the MBA proposed capping each pool's average coupon at 75 basis points above the pass-through rate that investors receive. The MBA also proposed adding to each pool a suffix to differentiate the new securities from standard Ginnie Mae I securities.