December3,2010

MarketsQuantitativeAnalysis

Citi MBS Focus

Review of Ginnie Mae Low Loan Balance Collateral

MikhailTeytel
2128168465
mikhail.teytel@citi.com

NeelabhBaranga

Ginnie Mae LLBs provide prepayment protection, with inthemoney speeds

rangingfrom40%to80%ofgenericspeeds.
In addition to lower voluntary speeds, Ginnie Mae LLBs have lower
delinquencies,resultinginlowerservicerbuyouts.

InthisarticlewetakeacloselookatGinnieMaeLowLoanBalancespeeds.Aswithconventionals,there
are three classes of Low Loan Balance collateral: LLB (Low Loan Balance: Max Loan Size <= 85k), MLB
(ModerateLoanBalance:85k<MaxLoanSize<=110k)andHLB(HighLoanBalance:110k<MaxLoan
Size <= 150k). We take a look at their issuance, collateral characteristics, delinquencies and
prepayments. For our analysis we are using GNMA I 30 year, where most of these specified pools lie
(approx.90%).Toavoidconfusionwewillusetheappropriateabbreviation(LLB,MLB,orHLB)todenote
aparticularclassoflowloanbalancecollateral,anduseLLBs(plural)todenotetheunionofallthree
classes.

Issuance
In terms of absolute dollar amount, issuance of GNMA LLBs has picked up significantly since the
beginning of 2007 and so has LLBs' share of Ginnie Mae I issuance (see Figure 1 and Figure 2). The
increasehasbeenmostsignificantforHLBpaperwhereissuanceincreasedby300%from$2billionto
$7.8 billion between 2009Q1 and 2009Q3. The bulk of recent originations of GNMA generic are 4.5s
whereasforLLBsthemajorfractioncomesfrom5s.

Figure 1. LLB Issuance ($ amount)

Issuance ($ amount)

8,000

LLB

MLB

14%

HLB

Issuance (as % of generic iss)

9,000

Figure 2. LLB Issuance (% of GNMA I 30 Yr issuance)

7,000
6,000
5,000
4,000
3,000
2,000
1,000

LLB

MLB

HLB

12%
10%
8%
6%
4%
2%
0%

04Q1

05Q1

Source: CPRCDR and Citi.

06Q1

07Q1

08Q1

09Q1

10Q1

04Q1

05Q1

06Q1

07Q1

08Q1

09Q1

10Q1

Source: CPRCDR and Citi.

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ReviewofGinnieMaeLowLoanBalanceCollateral

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Collateral Characteristics
In Figure 3 we take a look at the collateral characteristics of LLBs and GNMA generics. The table
highlightssomekeydifferencesamongunderlyingcollateralbesidesloansize.OLTVisslightlylowerfor
LLBandMLB,andisverysimilarforHLBswhencomparedtotheGenerics.Creditscoresalsoseemtobe
lowerbutcreditscoredataisverythinsowecannotinfermuchfromofthisinformation.

Figure 3. CLTV and Credit Score

Curr Balance ($ MM)

Coupon
Orig_Year
LLB
MLB
HLB
4.5
2009
940
2,421
7,151
4.5
2010
945
1,984
4,189
5
2009
2,573
4,834
10,904
5
2010
1,302
1,461
1,970
5.5
2003
611
357
677
5.5
2004
384
332
325
5.5
2005
340
490
290
5.5
2008
406
935
869
5.5
2009
639
970
1,470
6
2003
358
165
275
6
2008
939
1,457
1,169
ALL
ALL
16,722 22,391 39,253
* Credit scores may be based on a small sample
Source: CPRCDR and Citi.

ALL**
120,463
58,169
84,748
16,669
11,911
5,677
5,801
28,146
10,438
3,116
20,168
498,364

OLTV
MLB
HLB
92.9
94.1
93.2
94.2
93.5
94.4
93.2
93.7
95.3
96.0
94.6
95.4
94.6
94.6
92.9
94.2
93.5
94.4
94.5
94.9
93.1
94.2
93.7
94.6

LLB
91.9
92.2
92.6
93.1
93.9
93.4
93.6
91.0
93.1
93.8
92.2
92.8

ALL
94.4
94.4
94.2
93.6
95.5
95.4
94.9
94.0
93.7
94.6
93.8
94.5

LLB
660
695
667
676
675
609
668
661
631
678
646
684

Credit Score*
MLB
HLB
656
667
698
701
661
644
673
672
687
647
673
681
662
667
657
630
635
622
649
667
627
618
682
684

ALL
679
706
652
674
674
670
655
653
628
675
630
691

ItcanbeseenfromFigure4thatLLBshaveasignificantlysmallerfractionofrefinanceloanscompared
to generic paper, which is a consequence of their lower refinancing incentive. In terms of sponsoring
agencies, low loan balance paper has a lower share of VA loans and a greater share of Rural Housing
Service(RHS)loans.Thelatterprobablyreflectslowerhomepricesinruralareas.

Figure 4. Loan Purpose and Loan Type

Cpn
4.5
4.5
5
5
5.5
5.5
5.5
5.5
5.5
6
6
ALL

OYear
2009
2010
2009
2010
2003
2004
2005
2008
2009
2003
2008
ALL

LLB
36
21
26
18
61
50
41
34
20
42
29
31

% REFI
MLB HLB
46
50
26
28
35
39
28
36
67
59
46
39
41
48
38
38
29
34
55
42
35
37
37
36

ALL
58
33
48
40
58
36
31
43
40
44
40
46

LLB
85
81
82
62
74
87
88
84
83
90
82
80

% FHA
MLB HLB
85
83
83
85
84
83
72
90
71
72
84
81
84
82
89
88
85
84
90
85
91
92
82
82

ALL
78
78
83
77
67
73
70
83
86
83
86
75

LLB
6
6
4
4
25
12
11
5
4
9
4
8

% VA
MLB HLB
9
12
8
12
6
9
6
9
28
27
15
17
15
16
8
10
7
8
9
11
5
7
10
13

ALL
19
17
11
8
32
24
27
14
9
15
8
21

LLB
9
13
13
34
0
1
1
11
13
0
14
11

% RHS
MLB HLB
7
5
9
3
10
9
23
1
1
1
1
2
1
3
3
2
8
8
1
4
4
1
7
5

ALL
3
5
6
14
1
3
3
3
5
2
5
4

Source: CPRCDR and Citi.

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whichispartofCitigroupGlobalMarkets'salesandtradingoperations.
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December3,2010

Geographical Distribution
Figure5showsthepercentagedistributionforthetop20statesbybalanceofLLBs.Alsoincludedinthe
table are the 1year speeds for generic 2009 5s and the corresponding ratios for the three classes of
LLBs,whicharereasonableproxiesofhowfaststatespeedsare.Lowloanbalancecollateralhasalarge
share of Texas and Midwestern states Indiana, Michigan, and Ohio states that are incidentally
prepaying more slowly than average. This observation suggests that geography contributes to slower
LLB speeds. However because most of the ratios are less than 1, it is not the only contributor.
Moreover, this ratio increases from LLB to MLB, to HLB. Hence a favorable geographic distribution
shouldnotbetheonlyreasonforslowprepaymentsonLLBs.

Figure 5. Geographical Distribution of Ginnie Mae Low Loan Balance Collateral

STATE
TX
OH
FL
GA
IN
CA
MI
NC
MO
PA
IL
TN
AZ
OK
NY
AL
VA
AR
KY
LA
US

LLB
14.1
5.9
5.5
3.8
4.6
2.7
6.1
2.9
3.8
4.1
4.0
3.1
2.4
3.5
4.1
2.5
1.7
2.9
1.7
1.7
100.0

% Distribution
MLB
HLB
12.9
12.3
6.3
5.3
5.6
5.7
4.7
4.6
4.8
3.8
3.7
5.1
4.4
3.2
4.0
3.8
3.8
3.4
3.5
3.3
3.2
3.2
3.6
3.1
3.0
3.1
3.0
2.4
2.8
2.2
2.7
2.1
1.7
2.4
2.1
1.4
2.1
1.8
1.8
1.7
100.0
100.0

Generic
8.6
3.4
4.9
4.0
2.2
9.3
2.2
3.4
2.1
3.2
3.3
2.3
2.7
1.5
3.1
1.7
4.8
1.0
1.1
1.3
100.0

LLB
0.44
0.51
0.34
0.44
0.57
0.14
0.29
0.54
0.48
0.45
0.28
0.53
0.18
0.62
0.35
0.70
0.35
0.58
0.53
0.59
0.33

1 Year CPR
Ratio with Generic
MLB
HLB
0.56
0.67
0.61
0.61
0.44
0.51
0.52
0.71
0.57
0.71
0.14
0.24
0.48
0.68
0.48
0.66
0.55
0.70
0.40
0.52
0.39
0.43
0.72
0.64
0.35
0.49
0.70
0.66
0.26
0.46
0.72
0.64
0.48
0.38
0.81
0.64
0.50
0.65
0.63
0.70
0.40
0.48

Generic
9.0
12.2
10.2
15.3
12.6
20.0
16.1
14.9
17.4
12.0
23.6
13.7
19.6
7.6
10.3
12.9
18.0
10.8
13.1
8.3
17.1

Source: CPRCDR and Citi.

Delinquencies
Figure6showsthatthe60daydelinquencypercentagesaresmallerforLLBsthanforgenericcollateral.
Wehavechosenthe60daydelinquencynumbersinceitismoreindicativeofdelinquencylevelsthan
the90daynumberwhichishighlyaffectedbyservicerbuyouts.

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ReviewofGinnieMaeLowLoanBalanceCollateral

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Figure 6. % 60D for 2009 4.5s (left) and 2010 5s (right)

1.2

1.2

LLB
HLB

LLB
HLB

1
% 60-day delinquent

% 60-day delinquent

MLB
ALL

0.8
0.6
0.4
0.2

MLB
ALL

0.8
0.6
0.4
0.2

J-09

A-09

J-09

O-09

J-10

A-10

J-10

J-10

M-10

M-10

J-10

S-10

Source: CPRCDR and Citi.

GinnieMaeservicershaveanoptiontorepurchase90daydelinquentloansatparoutofGNMApools.
Buyouts can contribute significantly to the overall speeds. Figure 7 shows that both buyouts and
delinquencies are lower for LLBs than for generics. Figure 8 shows ratios of buyouts to 90day
delinquencies for 5s of 2009. Somewhat higher ratios for LLBs suggest that delinquent LLBs are
repurchasedslightlymoreefficientlythangenericloans,howeverthebiasisrathersmall.

Figure 7. 1-Month CBR for 2009 5s

Figure 8. 1-Month CBR / % 90D for 2009 5s

MLB
ALL

14
1-Month CBR / 90D (%)

1-Month CBR (%)

16
LLB
HLB

6
5
4
3
2

LLB
HLB

MLB
ALL

12
10
8
6
4
2

J-09 A-09 O-09 D-09 F-10 A-10 J-10 A-10

J-09 A-09 O-09 D-09 F-10 A-10 J-10 A-10

Source: CPRCDR and Citi.

Source: CPRCDR and Citi.

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Prepayments
Figure9shows1MonthCPRsfor4.5sand5sof2009forLLBsandgenerics.PrepaymentsforLLBsare
significantlyslowerthanforgenerics.

Figure 9. 1-Month CPR for 2009 4.5s (left) and 2009 5s (right)
35

20
LLB
HLB

18

30
1-Month CPR (%)

1-Month CPR (%)

16

MLB
ALL

14
12
10
8
6
4

LLB

MLB

HLB

ALL

25
20
15
10
5

2
0

0
J-09

M-09

S-09

J-10

M-10

J-09

S-10

M-09

S-09

J-10

M-10

S-10

Source: CPRCDR and Citi.

There are two major components of Ginnie Mae prepayments: voluntary prepayments and buyouts.
WhilewealreadyknowfromFigure6andFigure7thatLLBshavelowerdelinquenciesandbuyouts,itis
voluntaryspeedsthatcontributethebulkoftheprepaymentdifferenceinmostcases(seeFigure10).
Lower dollar incentive, relatively larger refinancing costs, and sometimes higher mortgage rates are
majorreasonsforslowerprepaymentsforLLBs.

Figure 10. 1-Month CPRs (left) and CRRs (right) for 5s of 2010
14

12
LLB
HLB

LLB
HLB

10
1-Month CRR (%)

1-Months CPR (%)

12

MLB
ALL

10
8
6
4

MLB
ALL

8
6
4
2

2
0

0
J-10

M-10

M-10

J-10

S-10

J-10

M-10

M-10

J-10

S-10

Source: CPRCDR and Citi.

Comparison to Conventionals
ToquantifytheextentoftheprepaymentprotectionaffordedbyLLBs,wecalculatetheratioof3month
CPRofLLBstogenericcollateral.Figure11showsprepaymentratiosforselectedGinnieMaecohorts.
LLBsprovidesignificantprepaymentprotectionwithprepayratiosgenerallyrangingfrom0.4to0.7.We
shouldalsonotethatamongLLBstheprepaymentprotectiongenerallyincreasesasloanbalancedrops.
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Figure 11. 3-Month CPR Ratios: LLBs vs. Generics for 2009 4.5s, 2009 5s, 2010 5s, and 2009 5.5s

2009 5s

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

LLB

J-09

MLB

S-09 N-09

3-Month CPR ratio vs. generic

3-Month CPR ratio vs. generic

2009 4.5s

HLB

J-10 M-10 M-10 J-10

S-10

1.2

LLB

0.6
0.4
0.2
0
M-09

J-09

3-Month CPR ratio vs. generic

3-Month CPR ratio vs. generic

0.8
0.6
0.4
MLB

HLB

0
A-10

M-10

J-10

J-10

S-09

D-09

M-10

J-10

S-10

J-10

S-10

2009 5.5s

LLB

HLB

0.8

2010 5s

0.2

MLB

A-10

S-10

O-10

0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

LLB

M-09

J-09

MLB

S-09

D-09

HLB

M-10

Source: CPRCDR and Citi.

Figure12showsthecomparisonof3monthprepaymentratiosforGinnieMaeandconventionalLLBsto
corresponding generics. On average, GNMA I LLBs provide better prepayment protection than FNMA.
ButwhenwelookatthebiggestcohortsofGNMAILLBs,theadvantageisonlyslight.

Figure 12. Prepayment Protection of LLBs: GNMA I vs. FNMA

Coupon
4.5
4.5
5
5
5.5
5.5
5.5
5.5
5.5
6
6
ALL

Orig_Year
2009
2010
2009
2010
2003
2004
2005
2008
2009
2003
2008
ALL

LLB
0.24
0.23
0.21
0.23
0.61
0.61
0.61
0.43
0.36
0.70
0.52
0.44

GNMA I 30-Year
MLB
0.32
0.24
0.32
0.37
0.72
0.82
0.73
0.53
0.53
0.87
0.64
0.55

HLB
0.42
0.34
0.48
0.53
0.92
0.82
0.80
0.77
0.74
1.03
0.89
0.61

LLB
0.38
0.29
0.33
0.31
0.52
0.53
0.59
0.49
0.49
0.62
0.56
0.54

FNMA 30-Year Fixed

MLB
0.39
0.27
0.44
0.31
0.70
0.74
0.75
0.64
0.54
0.84
0.71
0.67

HLB
0.47
0.34
0.58
0.44
0.84
0.89
0.89
0.78
0.71
0.99
0.87
0.79

Source: CPRCDR and Citi.

ThiscommentaryhasbeenpreparedbyMarketsQuantitativeAnalysis("MQA"),
whichispartofCitigroupGlobalMarkets'salesandtradingoperations.
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ReviewofGinnieMaeLowLoanBalanceCollateral

December3,2010

Conclusions
Slowprepaymentsoflowloanbalancecollateralhavebeenwelldocumentedinavarietyofinterestrate
regimes and a range of housing markets. In this article we confirm that prepayment protection also
extends to Ginnie Mae collateral. The extent of prepayment protection of Ginnie Mae LLBs is
comparabletothatofconventionalLLBs.

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