Risk in Loan Pools of GNMA-Guaranteed MBS: Evidence from Bank and Non-Bank Issuers

Abstract

While the recent decade of changing mortgage origination is well documented, loan pools assembled by MBS issuers have yet to be examined. To address this void in the literature, we provide an overview of the securitization process to connect institutions issuing securities to the origination process and clarify distinctions between GNMA as compared to FNMA and FHMLC in the MBS issuance process. Then, using a proprietary database of all MBS issuers approved by GNMA as of December 2016, we focus on the role of regulatory status in the risk of securitized loan pools for GNMA-guaranteed MBS. We find non-bank GNMA-approved issuers pool riskier mortgages with higher debt-to-income ratios, higher delinquency rates, higher gross margins, and slower prepayment than traditional depository institutions issuing MBS. Although the GNMA liquidity guarantee for MBS servicers protects MBS investors, our findings have long-run implications for U.S. taxpayers.