(Bloomberg) — United Wholesale Mortgage Co., the largest mortgage lender, is boosting incentives it offers its network of brokers that write certain types of mortgages, a move that could spur more refinancing and affect buyers of mortgage-backed securities.
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The mortgage wholesaler offers brokers an additional 1.25 percent commission on mortgages made through the Department of Veterans Affairs or the Federal Housing Administration, according to a notice on its website. This extra commission allows brokers to offer lower interest rates, giving homeowners more incentive to refinance with UWM.
That's a potential problem for buyers of mortgage-backed securities guaranteed by Ginnie Mae, the government agency that guarantees VA and FHA mortgages: Faster-than-expected repayments mean bond investors get their money back sooner, which typically translates into lower returns.
“It's still early to tell, but I think this increases near-term prepayment risk for Ginnie Mae securities,” said Erica Adelberg, MBS strategist at Bloomberg Intelligence. “It also highlights the idiosyncratic risks that come with Ginnie lending being dominated by a relatively small number of large independent mortgage bankers.”
The new incentives only apply to mortgages that qualify for a government program called “simplification” refinancing. These are mortgages that meet certain requirements, including being at least 210 days old and having at least six on-time payments.
“It remains to be seen, but these incentives could help many borrowers qualify for simplified refinancing who wouldn't have been able to do so before,” said Scott Buchta, mortgage strategist at Breen Capital.
Most mortgages in the United States are arranged by non-bank lenders. To find potential borrowers, they often rely on a network of independent brokers across the country. As compensation, brokers receive a small percentage of the disbursements for the loans they originate.
UWM is already one of the largest mortgage providers in the country, and the changes could signal an attempt to expand its presence in the market for borrowers eligible for loan guarantees from Ginnie Mae, Buchta said. Currently, there is about $100 billion worth of VA or FHA mortgages with interest rates of at least 7%, Buchta said.
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A flurry of mortgage refinancings by VA and FHA borrowers earlier this year sparked anxiety among investors who bought Ginnie Mae MBS and raised concerns that prepayments would remain high. Prepayments have slowed since then, but the new UWM program could reignite at least some of those concerns.
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