For more than 18 months, the Department of Housing and Urban Development, Ginnie Mae, and the Department of Veterans Affairs have been investigating whether certain lenders are aggressively targeting service members and military veterans for quick and potentially risky refinances of their mortgages.
Ginnie Mae even went so far as to issue new rules for VA loan refinances, restricting how soon a loan could be refinanced after its original origination date.
And while Ginnie Mae says that those changes have made a positive impact on its mortgage-backed securities, the agency is also now stating that more changes may be necessary to get the pervasiveness of VA loan refinances under control.
Ginnie Mae on Friday announced that it is seeking input on potential changes to its rules for VA loans. Namely, the agency is considering making more changes to its rule to “address abnormal prepayment patterns in some mortgages pooled in Ginnie Mae MBS that negatively affect MBS pricing.”
Ginnie Mae offers federally insured mortgage bonds for FHA and VA mortgage lenders. And according to the agency, the frequency of refinances, specifically cash-out refinances, is having a negative impact on its mortgage bonds.
Specifically, Ginnie Mae said that some of its securities are not trading where they should be compared to securities issued by Fannie Mae. According to Ginnie Mae, it recently identified “certain adverse trends” in the trading of its securities.
“It’s clear from published analysis and investor commentary that GII MIP securities were believed to be susceptible to refinance activity out of proportion to what should be expected from prevailing economic conditions,” Ginnie Mae said in its request for input.
“Ginnie Mae’s concern, then and now, is that investor trepidation about this activity will negatively impact investor confidence in the performance of the securities and the relative price that they receive in the market,” Ginnie Mae added. “Deterioration in market pricing translates directly into a higher cost of homeownership for the homeowners the Ginnie Mae MBS program is intended to serve.”
Put simply, Ginnie Mae appears to be concerned that investors aren’t as attracted to its mortgage bonds because they prepay to often. MBS investors seek stability, not volatility. They want their payouts over time, when they expect them, at the amounts they expect them to be. If the loans are being prepaid too often, investors don’t get their expected payouts.
And when that happens, investors turn to other options (like Fannie Mae bonds apparently) for their expected returns.
Ginnie Mae appears to have a problem with that.
The bottom line, according to Ginnie Mae, is that the previous actions it took towards its bond programs had “moderate success” in decreasing the “refinance spikes” that seem to not make sense given market conditions, but the agency appears to not believe that its controls are “sufficient” enough yet.
“Non-correlated VA refinance activity continues to be evident, and the extent to which it is a focus of analysts and investors is unhealthy for Ginnie Mae’s ability to fulfill its mission,” Ginnie Mae.
One of the main issues, according to Ginnie Mae, is a rise in VA cash-out refinances, as detailed earlier this year by CoreLogic.
According to CoreLogic, last year, of all refinances on government-backed loans offered by the FHA and VA, 76% were cash-outs – the highest share in the 20 years that this data has been collected.
More than 106,000 cash-out refis were backed by the government in 2018, more than twice as may as there were in 2014.
Ginnie Mae previously attributed the overall surge to its toughened standards for VA refis, but those rules don’t apply to cash-outs, a loophole that it was predicted Ginnie Mae would address.
And now, Ginnie Mae is considering making more changes.
“Ginnie Mae is confronting a situation in which the GII MIP, because of the combination of greater volume of VA loans and present-day borrowing/lending practices, is being utilized to support short-term consumer financing for veterans to a greater degree than has previously been the case,” Ginnie Mae said.
Therefore, Ginnie Mae said that it is considering changing its rules to “excluding from (or restricting within) the GII MIP loan type categories that can be expected to prepay at significantly higher rates from the loan types whose performance is better correlated with market trends and the intended purpose of the GII MIP securities.”
More directly, the agency said that it may exclude or restrict VA cash-out refinances in excess of 90% loan-to-value ratio from being include in multi-issuer pools.
Beyond that, Ginnie Mae said it may consider offering single-issue custom securities, basically separating the lenders that appear to be refinancing more often; creating a new mortgage bond offering specifically designed to include “shorter duration loan type categories;” and other changes.
“Protecting the value of our securities and, thereby, the borrowers Ginnie Mae serves, is paramount and, as such, modifications to our pooling parameters are under consideration,” said Ginnie Mae Acting President Maren Kasper. “This RFI enables the agency to take views from a wide variety of stakeholders under consideration as we work to eradicate abnormal prepayment patterns that are negatively impacting the performance of the Ginnie Mae MBS program.”
To read Ginnie Mae’s full request for input, click here.