existing mortgage tied to the old/higher MIP (aka refinancing). However, today’s prevailing mortgage rates are so much higher than most existing mortgages, which were originated with historically low rates over the last few years, that this exercise will not save most borrowers money. A 30 bp cut to the MIP simply is not enough to offset 300+ bps higher mortgage rates. Further, in order to qualify for a streamlined refinance of an FHA loan, a borrower’s new all-in payment rate (mortgage rate + MIP) must be at least 50 bps below their current level. That simply is not possible for most FHA mortgages in existence today. As a result, the impact on prepayment speeds for Ginnie Mae MBS will be minimal, at least for now. The landscape will certainly change if rates fall materially in the future but we should not expect to see a significant impact on prepayment speeds in the near term. Instead, the most consequential outcome of the MIP cut may be a marginal shift in production from conventional loans to FHA loans. In January, Fannie Mae and Freddie Mac announced a range of pricing changes applicable for conventional loans that will become effective in May 2023. Some borrowers’ costs will be reduced while others will go up. The MIP cut, which reduces monthly payments for all FHA borrowers across the board, combined with the pricing changes on conventional loans will make FHA loans comparatively less costly than conventional loans for a swath of borrowers, those with FICO scores between 680–760 and LTVs below 95. As a result, we could see some loans that would have otherwise been securitized into Fannie or Freddie MBS shift into Ginnie MBS. That would translate into a marginal increase in the supply of Ginnie MBS at the expense of Fannie and Freddie MBS. This should not have a material effect on valuations or demand but would swing the supply needle further towards Ginnie Mae production at a time when their market share is already rising. As persistently high home prices and rising mortgage rates have eroded affordability, many borrowers have fallen out of conventional loan eligibility and sought refuge in the looser credit qualifications of FHA loans, a trend which may only be exacerbated by the MIP cut. The upside for investors is slightly faster prepayment speeds if rates fall and the potential for an increased supply of loans available for pooling into attractive Ginnie CMO structures with 0% risk weighting. Andrea F. Pringle is a Financial Strategist and MBS Analyst at The Baker Group. She began her career in Washington, DC, where she also earned her MBA from George Washington University. Andrea worked on the Capital Markets Sales and Trading Desk at Fannie Mae for five years before returning to Oklahoma to work in corporate finance. Andrea joined The Baker Group in 2020, and her work focuses on mortgage products. Contact her by calling 800-937-2257 or emailing apringle@GoBaker.com. ONE LAST THING ... Did you know that you can enjoy your association news anytime, anywhere? Scan the QR code or visit: the-kansas-banker.thenewslinkgroup.org Check it out! The new online article build-outs allow you to: • Stay up to date with the latest association news • Share your favorite articles to social channels • Email articles to friends or colleagues There is still a flipping book for those of you who prefer swiping and a downloadable PDF.
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