Wherever you stand on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform, one thing that everyone seems to agree on is that the government should work to get more private capital back into housing financing. Fannie Mae and Freddie Mac issuances have taken the place of the private label mortgage backed securities (MBS) that all but disappeared after the financial crisis, but you don’t usually hear about the rapid growth of Ginnie Mae securities, which have an explicit Federal guarantee.

“Over the past housing cycle, the composition of mortgage origination has changed dramatically. Mortgages implicitly or explicitly guaranteed by the government are 90% of all loans originated, compared to two thirds before the crisis,” write Goldman Sachs analysts Hui Shan and Marty Young.

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Lower refinancing will increase Ginnie Mae’s market share

Not only are Ginnie Mae mortgages taking up a larger portion of the market, but Shan and Young expect them to continue growing as refinancing falls off. Ginnie Mae mortgages are more concentrated in agency purchase originations than in refinancing mortgages, so as the mix changes to include more purchase origination you would expect to see more Ginnie Mae MBS on the market.

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Refinancing rates have already fallen to the lowest level since the crisis, but Shan and Young expect it to continue falling for two reasons. First, there is a natural burnout effect where the people who are most likely to refinance (whether due to financial acumen, market awareness or just better advice) have already done so, locking in historically low interest rates. When interest rates finally start pushing towards more normal levels, fewer home owners will be able to refinance in the money, and the gradual decline in refinancing will turn into a steep drop.

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Ginnie Mae’s role expanding rapidly due to Fannie Mae, Freddie Mac reform

One of the goals highlighted both by the stalled Crapo-Johnson proposal for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform and by Federal Housing Finance Agency head Mel Watt is the desire to shield taxpayers from exposure to the mortgage market. The Ginnie Mae guarantee doesn’t kick in until home equity, mortgage insurance, and additional resources from the originator that passed through the MBS are used up. Whether this is a good model for government involvement in the mortgage market or a growing source of exposure, it’s odd that Ginnie Mae has gotten so little attention even though its role in the housing market is expanding rapidly.

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