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Selecting Ginnie Mae Borrowers to Construct MDX Indices
Vista MDX Indices are designed to offer a macro view of household credit performance by benchmarking mortgage borrower obligations, which are currently $13.1 trillion outstanding. The MDX.GN indices accomplish this goal by referencing loans guaranteed through Ginnie Mae government programs, which provide a broadly representative universe of borrowers and reliably reported data. Ginnie Mae loans have a diversified range of credit characteristics, such as FICO and loan-to-value (LTV) ratios, and geographic distribution throughout the country. At the same time, Ginnie Mae has mandated clear loan reporting requirements for mortgage originators and servicers to ensure data reliability. In short, the borrowers included in the $2.4 trillion outstanding Ginnie Mae MBS represent a real-time proxy for households in the US residential mortgage market. To measure the cumulative credit performance of these borrowers, Vista uses clear rules to construct sustainable indices. Below we discuss the objectives and methods that guide MDX.GN index loan inclusion rules.
Ginnie Mae II MBS securities constitute the largest and most liquid Ginnie Mae securitization program and are the source of reference loans for MDX.GN indices. For perspective, Ginnie Mae accounted for 27% of all US single family first lien mortgage debt issued in the past quarter. The Ginnie Mae loan universe provides a wider credit spectrum of borrowers than bank portfolio or conforming loans, since the underlying government guarantee programs accept lower-FICO mortgages underwritten to a higher LTV (e.g. FHA at 96.5%). These wider guidelines also allow for more first-time buyers, less sensitivity to housing affordability, and overall geographic dispersion.
Ginnie Mae releases loan-level information monthly detailing loan characteristics and payment performance to support the issuance and trading of GNMA MBS securities. Ginnie Mae loan servicing and reporting rules are federal regulations under HUD, which mandate accuracy and timeliness among other standards. The detail and transparency of this publicly available loan data ensures it is suitable for trading, research, and analysis. Thus, the Ginnie Mae loan data allows for clear application of Vista MDX.GN loan inclusion rules to create and, in turn, calculate, each Index Series.
Strict Vista loan inclusion rules are applied to create each Index Series. By using specific loan selection criteria, Vista ensures standardization of representative borrowers and vintages across indices. On average, this process results in approximately 85% of loans pooled in Ginnie Mae II MBS becoming reference borrowers in each MDX.GN Index Series. The principles that guide the rules and selection are detailed here.
As a result, each MDX.GN Index Series references a pool of performing borrowers that mirror the composition and trends of the period. Importantly, every market participant can apply the Vista MDX.GN rules independently to Ginnie Mae data and replicate the MDX.GN index. The rules are summarized here.
Tracking performance on the static pool of reference borrowers is straightforward. Every loan selected for an MDX.GN Index Series remains in the index regardless of prepayment or Credit Events. Maintaining a constant reference base allows the index to track the cumulative performance of those specific borrowers over time. This approach means that each loan experiencing a Credit Event has a consistent impact on the value of the Index Series and the MDX.GN swap write down factor, regardless of the remaining active loans in the index.
Loans are equally weighted in each Index. Reference loans are numerically counted, instead of weighted by unpaid principal balance (UPB), in order to measure the impact of Credit Events by borrower, not balance. This methodology simplifies modeling and is consistent with the CDX indices approach to obligors. Vista validated the integrity of this method in a comparative study calculating MDX by equal weighting and UPB weighting; each approach produced similar index results.
Loan level information is available from both Vista and ICE Data. The efficient publication of Ginnie Mae loan level data allows ICE Data, the MDX index calculation agent, to compute index values and statistics for distribution to the market. To request both loan level and aggregate MDX.GN data, please visit our website.
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