Mortgage originators seeking to sell their Ginnie Mae loans in the secondary market have multiple options when it comes to pooling and securitizing their loans, but for the most part, they stick with the standard best execution strategy of packaging their loans into standard multi-issuer pools, as opposed to going the extra mile to create custom pools that allow them to extract more value out of their Ginnie Mae pipeline.
However, that’s now starting to change, as broker-dealers are increasingly encouraging their originator clients to consider building custom, single-issuer pools for the purpose of picking up extra value in their pipelines. One such bank-dealer is Bank of Oklahoma (BOK), which currently trades roughly $4 billion to $6 billion in Ginnie Mae pools per month on behalf of its approximately 400 originator clients.
Newer trend: custom pools
According to Doug Sokolik, vice president, agency MBS sales and trading, at BOK, small to midsize lenders, in particular, are often missing the boat when it comes to recognizing opportunities to create custom pools that deliver this increased value.
“The trend right now is that more and more lenders are seeking to extract as much value from their Ginnie Mae pipeline as possible – and they’re recognizing that they can’t do that by just producing run-of-the-mill multi-issuer pools,” Sokolik tells MortgageOrb. “The fact is, if your servicer name holds value to institutional investors, you can also carve-out single-issuer custom pools and gain significantly greater value versus the multi-issuer pools. And we’ve been seeing that trend occur.
“Four years ago, there were less than $1 billion in Ginnie Mae II single-issuer custom pools created per month. The peak last year was over $5 billion. Right now, with rates where they are, we’re settling around $4 billion. But you’ve seen a big section of the Ginnie pool market become custom pools – and that’s because we’ve been working to educate our mortgage lender clients.”
Sokolik says that during the past two years that he’s been running BOK’s agency mortgage and structured products desk with partner Kurt Visokey, their desk has been primarily focused on trading Fannie Mae, Freddie Mac and Ginnie Mae specified pools with mortgage originator clients. “And we naturally have a large exposure to Ginnie Mae lenders,” he says.
One of the key differences between the Ginnie Mae loan program and those of Fannie and Freddie is that with Ginnie Mae, there is no cash window.
“The agency does not buy loans and securitize pools like Fannie and Freddie do. All mortgage lenders have to either create their own Ginnie Mae securities or sell them to another originator that is serving as a correspondent buyer,” Sokolik explains. This results in originators of all sizes securitizing their own Ginnie Mae securities and selling them in the secondary market to bank- dealers like BOK.
At the same time, “there is so much production in the Ginnie space,” he explains, pointing out that in February alone, production in Ginnie pools exceeded $30 billion.
“Earlier, in 2017 and 2016, we had months where Ginnie Mae production exceeded $40 billion,” he says. “But with refinances dropping off – and just given where rates are – right now we’re kind of settling into that $30 billion-per-month range.”
Despite the drop-off in production, the Ginnie Mae MBS space is still rife with opportunity for lenders – particularly those lenders who understand Ginnie Mae specified pool best execution.
“We have a lot of experience on the BOK trading desk dealing with originators of all sizes – and we’ve made it our mission to educate small- and medium-size lenders on Ginnie Mae best execution practices,” Sokolik says.
“In many cases, if you’re a lender that has a positive prepayment profile – meaning that you have slow prepayments – then you need to consider making single-issuer pools – whether those be Ginnie I securities or Ginnie II securities,” he adds.
That’s not to say that small and midsize mortgage lenders aren’t already packaging their Ginnie Mae loans into specified pools – many of them do so routinely. The point is that many of them could be doing a better job of “wringing the sponge,” so to speak, and extracting more value out of their pipelines through the development of more custom pools.
“Really, what it comes down to is that in the current market, these custom pools trade at premium-dollar prices, and investors are looking for call protected securities – meaning, the chance of a refi is less likely,” he says. “These custom pools most often come in the form of loan balance pools – which have stratifications. They can be broken down into $85K max pools – meaning that every loan in the pool is $85K or lower. The next cut is $110K – after that $125K, $150K and $175K. Those are the standard cuts.
Options available
“There are other pool options you can create as well,” he says. “For example, you can create a New York-only pool. Due to a refinance tax in the state of New York, it’s more costly to refinance, so we’ve seen investor demand for New York-only Ginnie II pools in a variety of coupons. Additionally, you can create pools where you’re only including one Ginnie Mae loan program. For example, the Section 184 Native American Housing Program. Those loans have a slower prepayment profile than the multi-pool, and other programs within Ginnie, so we’ve had lenders create 100 percent Section 184 loan custom pools.
“And within the world of Ginnie Mae, you can create custom pools with the other loan programs that include FHA, VA, and USDA,” Sokolik adds. “We’ve worked with investors recently to create 100 percent USDA pools – and it’s the same thing there; there’s call protection, there’s a pay-up and there’s value that is above the multi-pool, for that loan program, because historically the prepayment speeds have been slower than those of the VA or FHA.”
So why is it only recently that originators have changed their approach to the pooling process?
“Many accounts just got into the habit of creating multi-pools, queuing them up and submitting them to broker-dealers to bid, and just taking the generic route, instead of thinking about how they can extract more value,” Sokolik says. “What’s different about this process [of building custom pools] is that you need to think about your loans and think about the data in the loan tape.”
“We have been encouraging accounts to send us the loan tapes of the underlying data, out of their LOS ahead of pooling, so that we can take a closer look and help them extract value,” he says. “At a minimum, we are taking the loan size, the note rate, the Ginnie Mae program and the state information. That’s usually the minimum – but for the most part, lenders will send us the whole tape, just leaving out the borrowers’ personal information.”
“We work with lenders to comb through their loan files – and right before they’re pressing ‘submit’ to upload that loan file into Ginnie Net – or to ship that pool – to look at the loan-level data to see if there are opportunities to create custom pools,” Sokolik explains.
Because, he explains, once loan files are uploaded into Ginnie Net, there’s no going back.
“Maybe there are times that we’re not going to find any additional value – but there are times when we put that loan tape in front of institutional investors and they get comfortable with the prepayment speeds of that lender, and that leads to trades down the road,” he adds.
Although creating custom pools is nothing new to the largest originators, small to midsize originators are finding that the strategy can really pay off. As Sokolik points out, it’s not that the strategies have changed, but that more originators are getting more comfortable with the creation of custom pools versus multi-pools and investors are learning to appreciate the loans from smaller bank and non-bank lenders
“Over the past one to three years, originators have learned to appreciate that there are additional execution avenues in the world of Ginnie pools,” he says. “Multi-pools have been the standard; they are generic, they’re TBA-deliverable, and it might be the case that if you’re an originator, it only makes sense to make multi-pools. Because you might not be an originator with the footprint that is going to yield a population of lower-loan-balance pools that could be sold at a premium.”
“Small and midsize lenders either did not know to make those [custom pools], or they were afraid to make them because they can trade at a level that is below TBA value, because they’re non-deliverable,” Sokolik says. “In the Ginnie II space, if you make a single-issuer custom pool, it’s non-deliverable. That’s a very important thing for lenders to consider when they are making custom pools: They can trade negative to TBA. There is no floor or backstop in their pricing, as there is with a multi-pool that is TBA deliverable.”
That’s why it is critical for lenders to determine the degree of pay-up risk they are willing to take.
“Some of these custom pools can have pretty high pay-ups, or value above the generic multi-pool, and some might be ‘cuspier,’ if you will, to the multi-pool level,” he explains. “So, if you’re an originator that’s shipping loans and getting them ready to be submitted in Ginnie Net, that can take time. And if the market is moving, or if it is a less-liquid security, the originator could actually lose value, as they’re subject to some pay-up risk.”
“But now the accounts are aware of the opportunity; they more closely monitor pay-ups in the market to see where these custom pools can be created from their pipeline of loans,” he adds.
Sokolik says BOK helps protect its originator clients from this pay-up risk by providing the option to trade pools ahead of certification in the Ginnie Net system. If we help an originator find value above the multi-pool, this gives them the option to lock in that pay-up without the risk of the pay-up changing while they wait for certification before selling to a broker-dealer.
“We’re not simply brokering out specified pools that are presented to us by our originator clients – we have institutional customers that give us orders, and we also have balance sheet here,” he says. “We can buy, hold and position these securities – and that provides flexibility to our originator clients.”
Another way that BOK helps protect its originator clients from this pay-up risk is by offering a variance that covers changes in loan pool size that might occur between when the pools are traded and when they certify in Ginnie Net by the document custodian.
“We will actually trade these pools with the client ahead of certification in Ginnie Net, by the doc custodian,” Sokolik explains. Doing so locks in the sale to the mortgage originator, and they have no pay-up risk.
“Now, should the UPB amount on the pool change at certification, we work with our customers, and we will change and correct and update that amount. We can give them a variance so that the pool size can change, and we don’t need to re-trade the portion of bond that exceeded the variance,” he says.
“We do a lot of that – we kind of started that trend – and in the custom space we do more of that than any other dealer. We operate much like a primary dealer, but we are a regional bank and a regional dealer, serving originators of all sizes, so we want to pass along the flexibility that our balance sheet provides to all of those accounts. And we certainly do not want accounts to be exposed.”
Trade settlement and delivery practices
In addition to finding opportunities in pool creation, it is also very important to manage how you sell or BWIC your pools to broker-dealers. Sokolik always recommends trading with more than one broker-dealer.
If you are going to have 10+ correspondent buyers bid your loan tapes, don’t forget about the value in specified pool sales. One broker-dealer will rarely ever be your best bid across all maturities, coupons and custom stories in the Ginnie Mae pool universe.
Ginnie Mae’s default free delivery method for settlement often has originators thinking that they can only sell the bonds to one broker-dealer. This is, in fact, not the case because you actually can sell bonds ahead of certification and can also make the whole process smoother via the setup of a clearing account. BNY is the most common provider of this clearing service.
With your own clearing account, every Ginnie Mae pool that you create in Ginnie Net gets delivered into that account (not directly to a broker-dealer via free delivery), and then you instruct the clearing bank to deliver the bonds to the broker-dealer that had the best bid. The other significant benefit of this process is that all bonds sent out of your clearing accounts will settle via DVP (Delivery vs. Payment), thus eliminating any credit risk associated with free delivery. Originators are put at risk with free delivery settlements, especially when facing non-bank or lower capitalized broker-dealers.
More than anything, Sokolik says, BOK strives to be a trusted partner that can educate and inform its small to midsize originator clients on the best execution strategies for Ginnie Mae MBS.
“We are a trading desk – and we operate much like a primary dealer in that we trade a lot of volume – both with mortgage originators and institutional investors,” he says. “We certainly have a very good grasp on where the multi-pool markets are at all times. Those are the most liquid pools in the Ginnie Mae sector. And because we’ve been working with lenders over the past three to four years in creating customs, we know where the market is for those pools as well.
“There are a variety of buyers of these custom pools – they are being purchased by banks, structuring desks, money managers, insurance companies and other entities,” he concludes. “That helps us understand where the market is – and translate that into a pay-up level for our originator clients.”
Bank dealer services offered through Institutional Investments, Bank of Oklahoma which operates as a separately identifiable trading department of BOKF, NA. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
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