The reverse mortgage industry continues to see Ginnie Mae play a more important role, issuing $1.5 billion of reverse mortgage MBS (HMBS) in August. 

In order for growth to continue, there needs to be buyers and an article from the Wall Street Journal details how banks are buying up GNMA backed securities at a rapid pace. 

According to the WSJ, roughly 8,500 federally insured banks and thrifts are holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier.  It is the largest amount that banks have reported holding since at least 1994.  Why are we seeing such a large increase in volume?

Holding Ginnie Mae bonds makes banks balance sheets look better because federal bank capital guidelines give them a risk weighting of 0%, which means they don’t need to hold any cash in reserves to protect losses. 

Compare that to securities from Fannie Mae and Freddie Mac, which carry a 20% risk weighting, and require that banks hold cash aside in reserves.  By unloading securities from Fannie and Freddie and replacing them with Ginnie Mae bonds, banks reduce their total assets on a risk weighted basis. 

"With the pressure for capital, that’s really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank’s holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.

Investors also see the HMBS program as an attractive investment because of the estimated prepayment speeds.  Traders tell RMD that they’re valuing HMBS at a higher premium than a standard Ginnie Mae security because they don’t see reverse mortgages paying off as quickly as forward loans. 

Banks Load Up on Mortgages, in New Way (Wall Street Journal)