Refinancing Jumps in Government-Backed Mortgages, Bucking Market

(Bloomberg) -- A surge in government-guaranteed mortgage refinancings is underway, bucking the decline in the broader market since early June.

While a Mortgage Bankers Association refinancing index has dropped 8% since the week ending June 7, the government refinance sub-index is up 25%. Over the same period the conventional refinance sub-index has dropped 32%, according to data compiled by Bloomberg.

In the most recent prepayment report conventional Fannie Mae 30-year mortgages saw aggregate speeds drop about 3% to 12.8 CPR. In contrast, mortgages issued by Ginnie Mae, most notably Federal Housing Administration and Veteran Affairs loans, rose about 2% to 17 CPR.

• Speeds are measured by so-called conditional prepayment rates (CPR), a number that gives the annualized percentage of the existing mortgage pool expected to prepay

The FHA and VA have streamlined programs that allow for easier and relatively lower-cost refinancings compared with Fannie Mae and Freddie Mac conventional loans. These government mortgages tend to exhibit larger loan sizes then conventional mortgages, as the latter often see a downpayment of about 20%. In contrast, VA mortgages require 0% and FHA requires only about 3.5% from borrowers.

The speed difference between aggregate Fannie Mae 30-year mortgages and their Ginnie Mae II counterparts has increased this year, with the latter paying 5.2 CPR faster in June from 2.1 faster in January, according to Wells Fargo data. This may be one factor behind the recent cheapening of Fannie Mae compared with government MBS.

With two additional business days available in July versus June for borrowers and brokers to work on refinancings, along with the traditional boost provided by summer seasonals, the recent drop in the overall refinancing index may be at an end. JPMorgan MBS strategists expect speeds to see a 30% cumulative increase over the next two months.

• Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Christopher Maloney in New York at cmaloney16@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Adam Cataldo, Rick Green

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