surferdude808

Ginnie Mae Extension Risk - Well, Assume Me!

extension risk is huge in this environment and much greater for portfolio lenders. newly originated low coupon mortgages are going to stay on balance sheets for a very long time; therefore, you better love these loans. this is also an issue with loan mods, particularly anyone following the fdic "mod in a box" program, which calls for lowering the coupon to 3% and maturities up to 40 years. if anyone knows how a portfolio lender can effectively fund these mortgages please let us know. btw, the cost of this funding for portfolio is not even considered in the fdic test to determine if the mod should be performed. low coupon, long duration mortgages were what killed the thrift industry when intrest rates exploded in the 1970s. if the majority of outstanding mortgage loans get re-written at low coupons, then the seeds of the next crisis are being sown as this rate environment will not last forever.