Ginnie Mae has issued a formal request for input
regarding changes to its II Multi-Issuer Program (GII MIP). That program represents almost a third of the
mortgage-backed securities (MBS) issued by the agency. The program uses an aggregation of loans from
a wide variety of lender/servicer issuers and contains loans with a broad base
of loan characteristics.
The agency says it is vigilant about any trend that
might affect investor confidence in the program, and this was noted in the
recent attention paid to what was termed “churning” of loans originated through
the Department of Veterans Affairs (VA) that were being rapidly prepaid through
the streamlined loan process. (That issue was reported
on by MND in February 2018.)
Counterparty risk arose when issuers specialized in such products and
constructed overly concentrated servicing portfolios.
The actual and projected levels of loan prepayments is
a primary concern to MBS investors and analysts, especially when the security
was sold at an above-par price. While prepayments are a well understood feature
of this type of investment, concerns arise when investment losses because of refinancing
appear out of sync with economic fundamentals.
When trading of the GII MIP securities were compared
to securities issued by Fannie Mae it appeared that the former appeared
susceptible to refinance activity out of proportion to what should be expected
under prevailing conditions, i.e. uncorrelated refinance spikes. This raises
concerns over whether such a discrepancy will negatively impact investor
confidence in the securities and thus the relative price they achieve in the
market. Any deterioration in price
translates directly into higher borrowing costs for the homeowners Ginnie Mae
is intended to service.
Policymakers have noted the consumer protection aspects.
Congress, Ginnie Mae, and the VA have
taken several actions to curb the rapid refinancing in the VA program including
a six-month seasoning requirement for streamline refinance loans and cash-out
refinances before they are eligible for pooling. Ginnie Mae also identified security
performance as being subject to standards of acceptable risk and began
reviewing it at the issuer level and restricting issuers whose performance
deviated substantial from that of others.
The agency says it believes that these policy initiatives
have probably had moderate success in reducing uncorrelated spikes but is not
convinced that the current safeguards are sufficient. Non-correlated VA refinancing continues to be
evident and, to the extent it is the focus of investors and analysts, not
healthy for Ginnie Mae’s mission.
The agency has been reviewing loan data in order to
understand the relative performance of different loan categories. Looking at
pooling and monthly reporting data from January 2017 to March 2019 they have found
liquidate with greater frequency than purchase loans.
liquidations occur on average earlier than do those of FHA loans.
refinance loans with higher loan-to-value (LTV) ratios liquidate with greater
frequency and with more impact on prepayments than FHA loans with comparable
The loans that were analyzed were originated at differing
times relative to the policy changes noted above, particularly the VA rule, so
it is difficult to determine the impact of the changes. It is also difficult to determine how much the
differences in performance of the VA and FHA loans may be attributed to the
parameter differences in the two programs, differences which are one of the
purposes of the GII MIP. However,
despite program requirements, there appear to be other dynamics at play, particularly
as it relates to prepayment speeds and the security performance.
Ginnie Mae says it is exploring further actions and
the Request for Input is to give program stakeholders and observers a chance to
provide analysis and insight to guide the agencies decisions. It sets out two areas for consideration.
The first is the need to ensure that the loans made
serve the interest of homeowning veterans. The second is the extent to which the more
lenient VA requirements are fostering short-term borrowing patterns at odds
with the GII MIP program. Ginnie Mae views the GII MIP products as those where the
average lifespan can be expected to align with ownership of the property,
adjusted periodically to improve loan terms when interest rate cycles are
Cash-out refinances serve a role for borrowers, but
usually on a smaller scale as both FHA and the GSEs Fannie Mae and Freddie Mac
have more stringent LTV requirements for cash-outs than does the VA. Ginnie Mae is concerned that its program, due
to the combination of a greater volume of VA loans and current borrowing and
lending practices, is serving as a short-term vehicle for consumer finance to a
greater degree than previously and this situation may be having an adverse
impact on pricing these securities. This
would also result in cross-subsidization of the remaining high LTV VA, FHA, and
USDA borrowers whose loans are commingled in the security.
One change under consideration is the exclusion from
or restricting within the acceptable GI MIP loan type categories those loans
than can be expected to prepay at significantly higher rates. Because of their
performance history in the securities and the difference in their LTV
requirements from FHA and GSE loans, this would mean specifically VA cash-out
refinances in excess of 90 percent LTV.
If such an exclusion or restriction is enacted and
given its mission, Ginnie Mae would seek to provide an alternative
securitization pathway. The logical
possibilities for doing this would be single-issuer custom securities,
imposition of a de minimis standard
restricting inclusion in the MIP, or creation of a new MIP specifically for
shorter duration loan types.
Given these issues, Ginnie Mae is inviting comments on
extent to which the varying prepayment performance of different loan types
should be considered acceptable.
analysis on the propensity of high LTV cash-out refinances to prepay and
whether 90 percent LTV is the appropriate threshold for any restriction or
analysis on the impact of the VA high LTV loans’ propensity to repay on pricing
of the securities.
on an alternative securitization path should these loans be
excluded/restricted, including discussion of marketability, pricing, liquidity
and TBA market implications.
Comments must be submitted to Ginnie Mae by 3 p.m. EDT
on May 22.