1. Southern Finance Association
Changing US Mortgage Market & Agency Securitization: Evidence from GNMA
Authors:
D. Brian Blank
Mississippi State University
Michael J. Highfield, CFA, CTP
Rustin T. Yerkes, CFA
Samford University
2019
Southern Finance Association
Annual Meeting
Orlando, Florida
2019 Southern Finance Association Annual Meeting – Orlando, Florida

2. Motivation: Mortgage Market Background
Three Structural Changes in the U.S. Mortgage Market
Origination:
Bank  Non-bank
Securitization:
Non-Agency  Agency
Investors:
The Federal Reserve

3. Motivation: The MRS Market is Important
$8,921.2
billion

4. Motivation: The Cast of Characters
FNMA and FHLMC
U.S. government sponsored enterprise (GSE), not a government agency.
Can issue and guarantee MBS, but its guarantee is not backed by the government.
GNMA
Operates as a government agency.
Does NOT issue MBS, but guarantees MBS issues from qualified private institutions for mortgages guaranteed by federal agencies, such as the FHA and VA..
GNMA guarantees the timely payment of principal and interest from approved issuers (such as commercial banks, S&Ls, and mortgage bankers) of qualifying loans.
The GNMA guarantee means that Investors never have to worry about the impact of late payments or mortgage defaults on their investment: when mortgage borrowers fail to make a payment, GNMA steps in to honor those missed payments. 

5. Origination: Source of GNMA Mortgages

6. Origination: “Shadow Banking”
2,000 lenders have exited since the peak
Fratantoni (JSF, 2016)
Regulation, such as stress testing of banks, restricts mortgage lending
Calem et.al. (2016)
Less competition = higher fees
Ambrose & Conklin (REF, 2014)
Bank loan quality higher than loans from non-banks
Downs & Shi (JREF, 2015)
Shadow banking sector is not monitored liking banking sector
Judge (2017); Adelino et.al. (2017); Keys et. al (2012; 2010); Plantin (2015); Sunderam (2015).

7. Securitization: Agency vs. Non-Agency Issuance
Non-Agency Issuance surged then collapsed in 2008

8. Securitization: Non-Agency CMBS vs RMBS Issuance
Non-Agency market is divided between Commercial (40%) and Residential (60%)
RMBS
RMBS

9. Securitization: Non-Agency RMBS Outstanding by Rating
Non-Agency Commercial MBS are highly rated
(Office, Retail, Multi-family, Hospitality, Industrial)
Non-Agency Residential MBS Carry Junk or NR
(Subprime, Alt-A, Jumbo)

10. Securitization: Non-Agency RMBS Issuance

11. Securitization: Agency RMBS Issuance, 1970 - 2016

12. Securitization: Agency RMBS Outstanding, 1970 - 2016
GNMA ≈ FHLMC
RMBS

13. Data – Sources and Description
Quantalytix
Proprietary database
Mortgage Market data
Securities Industry and Financial Markets Association (SIFMA)
Data is aggregated to lender/originator level
By the Numbers
337 GNMA Lenders
89 (23%) are Chartered Financial Institutions
Largest Chartered: Wells Fargo - $200 Billion
248 (77%) are “Other” Institutions
Largest Other: Freedom Mortgage Corporation - $100 Billion

14. Data - Structural Changes to Origination
Increase in compliance and regulatory costs for banks
Banks exiting, curtailing, capping mortgage exposure
Meanwhile, non-bank regulatory environment much less onerous
Bank share of GNMA Issuance
2013: 60%
2017: 27%
Non-bank share of GNMA Issuance
2013: 40%
2017: 73%

15. Results: Table 1 – Panel A

16. Results: Table 1 – Panel B

17. Results: Table 1 – Panel C

18. Summary Results: Tables 2 & 3 (Delinquencies)
Variable
Months Delinquent
Delinquencies (%)
Purchase Delinquencies
Modification Delinquencies
Chartered –
Res. Income NS
Interest Rate
Issue Balance
FICO
Loan Term +
Borrower Count
MIP Upfront
DTI
LTV

19. Summary Results: Table 4 (Gross Margins)

20. Preliminary Conclusions
Residential mortgage origination is shifting from Banks to Non-Banks
Agency securitization subsumes non-agency securitization post 2008
Non-bank borrowers have larger loans, larger payments, and lower residual income. They also pay a higher rate.
Non-banks have higher delinquency rates
Delinquencies are 1 to 2 times higher than banks
Non-banks have marginally higher loan portfolio gross margins
Gross Margins are 2 to 3 times higher than banks.

21. Southern Finance Association
Changing US Mortgage Market & Agency Securitization: Evidence from GNMA
Authors:
D. Brian Blank
Mississippi State University
Michael J. Highfield, CFA, CTP
Rustin T. Yerkes, CFA
Samford University
2019
Southern Finance Association
Annual Meeting
Orlando, Florida
2019 Southern Finance Association Annual Meeting – Orlando, Florida