(Bloomberg) — Top mortgage lender United Wholesale Mortgage is upping the incentives it offers its network of brokers for making certain types of home loans, a move likely to accelerate refinancings that could have implications for buyers of mortgage-backed securities.
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The mortgage wholesaler is offering an additional 1.25% of compensation to brokers for mortgages done through the Department of Veterans Affairs or the Federal Housing Administration, according to a notice on its website. The extra compensation will allow brokers to offer lower rates, giving homeowners a greater incentive to refinance with UWM.
That’s potentially problematic for buyers of MBS backed by Ginnie Mae, the government agency that guarantees VA and FHA home loans. Quicker-than-expected repayments cause bond investors to get their money back sooner, typically leading to lower returns.
“It’s still early, but I think this increases near-term prepayment risks for Ginnie Mae securities,” said Erica Adelberg, an MBS strategist at Bloomberg Intelligence. “It also highlights the idiosyncratic risks that come with Ginnie originations being dominated by a relatively small number of large independent mortgage banks.”
The new incentives only apply to mortgages that are eligible for a government program called a “streamlined” refinance. These are mortgages that meet certain requirements, such as being at least 210 days old and with at least six on-time payments.
“It remains to be seen, but these incentives may help a lot of borrowers qualify for a streamline refinance that may not have been able to before,” said Scott Buchta, a mortgage strategist at Brean Capital.
Most residential mortgages in the US are arranged by non-bank lenders. To get in front of potential borrowers they often rely on networks of independent brokers around the country. As compensation the brokers receive a small portion of the payments on the loans they originate.
UWM is already one of the biggest providers of mortgages in the country, and the change may signify that it’s trying to expand its footprint in the market for borrowers eligible for a loan guarantee by Ginnie Mae, according Buchta. There’s currently about $100 billion worth of VA or FHA mortgages with rates of at least 7%, he said.
Earlier this year a wave of VA and FHA borrowers refinancing their mortgages produced a spasm of anxiety for investors who’d bought Ginnie Mae MBS, leading to worries that prepayments would persist at higher levels. Since then prepayments have slowed, but the new UWM program could revive at least some of those worries.
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Source: finance.yahoo.com