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The Rise of VA-Backed Originations

Ginnie Mae’s share of agency mortgage-backed securities has risen from 25 percent in 2013 up to 32 percent as of September 2016, surpassing Freddie Mac’s share of MBS issuance back in June.

The main drivers of Ginnie Mae’s rising share of MBS issuance were FHA refinance activity, the reduction in FHA’s insurance premium (by 50 basis points in January 2015) and increased volumes of VA-backed originations, according to the Urban Institute’s Monthly Chartbook for October 2016, released Monday.

In fact, the share of VA-backed mortgage originations has risen sharply in recent years while the FHA’s share has declined during the same period. In 2009, the year after the crisis hit, the VA’s share of agency-backed loans was just 17 percent (approximately $75 billion out of $450 billion) while FHA-insured mortgages comprised $360 billion out of the remaining $375 billion (about 80 percent of the total share). USDA (U.S. Department of Agriculture) loans comprised the remaining $15 billion.

By 2015, six years later, the gap between the VA share and FHA share had closed significantly, however.  Whereas FHA-insured loans dominated the government’s channel of mortgage loans in 2009, that share had shrunk to 57 percent by 2015 to slightly more than $260 billion. Meanwhile, VA’s share had more than doubled from 17 percent to 39 percent (approximately $155 billion) by 2015, according to the Urban Institute.

The trend of rising VA share and falling FHA share has two important implications for the mortgage market, Urban Institute reported. The first is, VA mortgages tend to refinance at much faster rates than FHA mortgages (due to better credit characteristics from borrowers such as higher FICO scores and lower DTI ratios), which causes Ginnie Mae MBS to prepay sooner. The VA refinance program does not require appraisal, underwriting, or out of pocket expenses; VA borrowers also tend to have higher loan balances than FHA loans and stand to save more money by refinancing.

“Not surprisingly, for most of 2016, the share of total VA originations that was refinances ranged from roughly 50 to 60 percent, while the corresponding share for FHA mortgages remained in the 30 to 35 percent range,” Urban Institute reported. “Faster prepayments ultimately cause Ginnie Mae securities to appreciate less as rates decline, leaving MBS investors with a lower return than they would have otherwise received.”

The second important implication for the market, according to Urban Institute, is that the trend underscores the need to more strictly regulate non-bank lenders. The VA covers only 25 percent of the loan amount and the lender remains on the hook for the remaining 75 percent should the loan default, unlike the FHA, which insures 100 percent of its mortgage loans.

“This risk has increased in recent years due to the growing role of nonbank lenders in mortgage origination/servicing and the relatively thin regulation they operate under,” Urban Institute said. “And as the VA plays an even bigger role in the mortgage market in the coming years, its risk exposure to nonbank lenders will only increase further.”

 

 

About Author: Seth Welborn

Seth Welborn is a Harding University graduate with a degree in English and a minor in writing. He is a contributing writer for MReport. An East Texas Native, he has studied abroad in Athens, Greece and works part-time as a photographer.
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