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Ginnie Mae Capital Markets Live Ep 1 -- Factors Influencing Ginnie Mae MBS Prices - YouTube
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Alven Lam: Hello, and welcome to Capital Markets
Live.
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I'm Alven Lam, Managing Director for International
Markets at Ginnie Mae.
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For our first episode, we talk with Jim Palmieri,
he鈥檚 the Managing Director and Head of Structural
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Credit for State Street Global Advisors.
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In this conversation, we discuss the performance
of Ginnie Mae securities during the Coronavirus
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pandemic, and what these developments mean
for investors concerned about the performance
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of their MBS.
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Jim, welcome to the inaugural edition of Capital
Markets Live.
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Jim Palmieri: Thank you, it's good to be here.
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Alven Lam: It has been several months since
the Coronavirus disrupted our lives.
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We have seen with the rise in unemployment,
the U.S. government develop programs that
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help borrowers make mortgage payments, like
supplemental unemployment insurance, and the
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patient protection program or PPP under the
CARES Act.
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How has the COVID-19 affected the current
MBS environment.
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Jim Palmieri: The current environment reflects
the enormous government response to COVID-19.
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As a result, we've seen a collapse in interest
rates and fx hedging costs, a remarkable recovery
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in risk assets, particularly in the stock
market and the U.S. corporate credit market,
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and record low mortgage rates resulting in
faster mortgage prepayments.
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As you mentioned, U.S. policy makers reacted
quickly with novel forbearance policies to
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help build a bridge through the crisis, which
to date, has supported the housing market
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and limited involuntary prepayments.
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Of course, uncertainty remains regarding the
path of COVID-19 and the pace of the economic
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recovery, which of course creates involuntary
prepayment uncertainty, in particular for
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Ginnie MBS.
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Specifically, bank buyouts have picked up
in the past few months, but there is still
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uncertainty regarding the expected pace and
magnitude of non-bank buyouts.
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Alven Lam: I want to follow up on this.
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Investors have great concerns about the buyouts.
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What is your outlook for non-bank buyouts?
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Jim Palmieri: Our outlook for non-bank buyouts
factor in the capacity constraints that exist
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within the non-bank servicer system, the flexibility
for borrowers to extend forbearance, and our
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economic recovery outlook.
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On the margin, the more optimistic one is
on the recovery, the less of a problem buyouts
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will be from non-bank servicers as delinquent
mortgage loans will cure, and of course vice
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versa.
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Alven Lam: Thank you for answering that.
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Do you think all of the bad news has been
priced into the Ginnie Mae MBS market.
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Jim Palmieri: Well, Ginnie Mae UMBS spread
pricing has repriced significantly over the
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past three months in response to this uncertainty.
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For example, the Ginnie Mae UMBS two and a
half swap has fallen more than 40 ticks in
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that period, and the spread between the two
is now roughly flat.
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Now regarding whether all of the bad news
has been priced in, I would say that based
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upon our analysis, a fair amount of bad news
has been priced in and we think that a relative
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value case can be made in favor of Ginnie
Mae MBS.
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In fact, Street research is already picking
up on the relative value of the Ginnie Mae
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UMBS two and a half swap and they've produced
a fundamental and technical analysis for the
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trade at current market pricing.
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And finally, given the remarkable recovery
observed in corporate credit spreads we see
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corporate credit spreads in the context of
long-term fair value versus Ginnie Mae MBS.
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There's a case to be made for the stability
and diversification benefits of Ginnie Mae
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MBS versus corporate credit.
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Benefits that reveal themselves during the
spike in market volatility experienced in
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March of this year.
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Alven Lam: Great.
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Going forward, what variables will you follow
to improve the outlook for Ginnie Mae securities?
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Jim Palmieri: Well first, we'll look for continued
signs of a slowdown in Ginnie Mae prepayment
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speeds.
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The August and September prepayment reports
were favorable.
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As with some clarity on the topic of non-bank
buyout activity.
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Also, continued improvement in the U.S. economy's
recovery would lower the unemployment rate,
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and as a result reduce uncertainty regarding
involuntary prepayments or buyout risk.
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And of course, a COVID-19 vaccine would be
a game-changer.
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Alven Lam: Indeed.
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More broadly speaking, what is your overall
outlook for the U.S.?
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Jim Palmieri: You know, of course the path
of COVID-19 will continue to play a central
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role in determining the speed and length of
the recovery.
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As a firm, we see the recovery linked to four
legs of a stool, with COVID-19, monetary policy,
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fiscal policy, and the price of oil representing
the four legs.
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We've seen improvements in COVID-19 versus
the peak, we continue to see substantial and
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persistent monetary policy support, substantial
fiscal policy stimulus remains in place, and
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we've seen a recovery of oil prices back to
40.
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Importantly, we've observed a significant
pickup in economic activity, not only in the
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U.S., but across the globe, and we continue
to expect improvements in economic activity
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in the near term.
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A continued improvement in economic activity
could result in a moderate increase in long-term
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U.S. interest rates, which of course would
serve to dampen voluntary prepayment speeds
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for Ginnie MBS as well.
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Alven Lam: Well thank you so much Jim for
your time and insights.
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Jim Palmieri: Thank you.
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Alven Lam: That was Jim Palmieri, Managing
Director and Head of Structured Credit at
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State Street Global Advisors.
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If you like our podcast, be sure to subscribe
to future episodes of Capital Markets Live
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on YouTube.
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Have comments or questions about today's episode,
or other topics?
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Send us an email at [email protected]
or message us on twitter @GinnieMaeGOV.
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Until then, stay healthy and prosper.
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