Today Ginnie Mae published APM 20-07, which announces changes to our policy concerning the re-pooling of certain loans that have been bought out of pools. These changes were driven by the borrower relief and loss mitigation policies implemented by the insuring and guaranteeing agencies (HUD, VA, and USDA) in response to the COVID-19 national emergency, and our analysis of how those policies might affect the performance of Ginnie Mae securities and the future price of credit under the federal mortgage programs.
At the heart of this is the issuer’s option to buy a loan out of a pool after 90 days of delinquency. The buyout option exists because – in contrast to the Government Sponsored Enterprises – Ginnie Mae is not the issuer of the pools it guarantees, and does not utilize its own balance sheet to manage delinquencies (in the normal course). The buyout option therefore gives an issuer the ability to have some control over its exposure to the scheduled principal and interest pass-through requirement that applies to loans in pools, as well as to Ginnie Mae’s delinquency thresholds, from which Ginnie Mae has also provided relief to issuers as part of our response to the national emergency.
As with refinances, buyouts can cause an economic loss for security holders when mortgage-backed securities trade at premium prices. As a general matter, the risk of such losses is a normal consequence of investing in this asset class. What Ginnie Mae guards against in particular, however, are scenarios where liquidations (and losses) occur as the result of unanticipated events or gaps in government policy – the risk being that a commensurate loss of confidence in the security on the part of investors would translate into lower security prices and ultimately a higher cost for the homeowners the program is intended to serve.
A combination of circumstances arising out of COVID-19 presents a high risk of triggering buyout activity that could undermine the integrity of the MBS program, namely transactions in which resolution of a delinquency is known to come from an agency insurance or guaranty payment that does not require a buyout – but where a buyout is executed anyway solely to allow the issuer to capture premium security pricing.
Ideally, Ginnie Mae would prohibit only those types of buyouts. But in practice, it is impossible to identify those types of buyouts as they happen; buyouts can occur at different times and are driven by a variety of considerations. Care must be taken, in protecting against transactions that could be harmful to the program, to impinge as little as possible on the ability to buy out loans in the manner the program terms are intended to facilitate.
For this reason, Ginnie Mae’s approach to the unique COVID-19 circumstances is to leave the buyout rules unaltered and instead place restrictions on the ability to re-pool certain re-performing mortgages previously bought out of pools. This should lessen the economic incentives to strategically buy out loans in a way that may be harmful to the integrity of the MBS program (as more fully detailed in APM 20-07), while still maintaining an avenue to redeliver loans into securities guaranteed by Ginnie Mae.
While we recognize that this approach may not be fully satisfactory to any of the constituencies that are affected by buyout and re-pooling transactions, we believe that it represents a reasonable and appropriate balancing of the interests at stake and maintains the focus appropriately on the loss mitigation activities that will help affected homeowners.
I wanted to communicate about Ginnie Mae’s efforts to address any servicer liquidity issues that might result from the COVID-19 emergency.
Under the Ginnie Mae MBS program, the approved issuers who service mortgage-backed securities (MBS) are required to remit scheduled principal and interest (P&I) to investors, and make various other payments in connection with mortgage loans, even when monthly payments are not received from borrowers. Indeed, the cornerstone of our MBS Guaranty program has been and will always be that the investors who support access to affordable mortgage credit for the U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA) borrowers by purchasing Ginnie Mae securities will receive payments of principal and interest on time and in full.
We have heard from our issuer and servicing partners that borrower forbearance arrangements that are nationwide in scope could place an enormous strain on issuers. This strain would be caused by the immediate need to advance required pass-through payments to investors, or other entities entitled to receive payments, and the later reimbursement of those advances by borrowers or the agencies who insure the loans (HUD, VA and USDA under the Ginnie Mae program).
Please know that we are taking action to address these concerns and potential liquidity challenges faced by Ginnie Mae issuers. Ginnie Mae has the authority to make changes to the requirements of our program, and we are using those powers to tailor the existing disaster pass-through assistance programs to more suitably scale to the needs of this National Emergency.
Ginnie Mae fully anticipates implementing within the next two weeks, via an All Participants Memorandum (APM), a Pass-Through Assistance Program (PTAP) through which issuers with a P&I shortfall may request that Ginnie Mae advance the difference between available funds and the scheduled payment to investors. This PTAP will be effective immediately upon publication of the APM for Single Family program issuers, with corresponding changes made to Ginnie Mae’s MBS Guide in due course. We anticipate publishing PTAP terms for HMBS (reverse mortgage) and Multifamily issuers shortly thereafter.
Under current policy, the advancing of funds by Ginnie Mae to an issuer as a result of a Major Disaster declared by the President of the United States would be a considered an event of default under our program. But, because the current National Emergency is not limited in geographic scope in the way a natural disaster is, a P&I advance by Ginnie Mae through the PTAP will not be considered an event of default, though all other program requirements will continue to apply. In return for any payments advanced under the PTAP, issuers will be required to sign an agreement with Ginnie Mae and must repay the advance within a specified time period. The agreement with Ginnie Mae will provide for extension requests and specify the rate of interest that will apply to the borrowed advances.
To be perfectly clear, borrowing under the PTAP should be a “last resort” financing option to alleviate a liquidity shortage faced by any Ginnie Mae issuers. PTAP’s purpose will be to support the forbearance and loss mitigation programs of our insuring agency partners (FHA, VA and USDA) by minimizing potential disruption in the mortgage servicing market so that those federal mortgage insurance and guarantee programs can be administered efficiently and with maximum help to borrowers. Ginnie Mae will choose to make these advances only where doing so will further the program mission and the American taxpayers who stand behind it.
As noted above, these exigent changes to Ginnie Mae’s disaster pass-through program under the PTAP will allow us to continue to honor our statutory duty to ensure the timely and full payment of P&I to Ginnie investors.
I also want to relay that the implementation of the PTAP is not the only step Ginnie Mae is taking to alleviate the effects of the National Emergency. We have recently acted to facilitate electronic execution and transmission of certain pooling documents (see APM 20-01), and delayed submission requirement for audited financial statements from issuers (see APM 20-02). We are also expediting our digital collateral initiative, and in the near future Ginnie Mae expects to publish information about forbearance of sanctions for violation of liquidity and delinquency standards attributable to the COVID-19 crisis.
Nonetheless, while PTAP and these additional policy actions will not by themselves address the full range of potential stress on issuer cash flows and operations, market participants should be assured that Ginnie Mae is acting expeditiously and forcefully to support relief for American homeowners and meet its statutory responsibility to provide stability and liquidity in the secondary market for residential mortgages.
With the housing finance system experiencing a significant evolution, it’s an exciting time to be a part of Ginnie Mae. The agency is developing new programs, processes and technology to ensure that it remains a reliable source of capital for the government mortgage loan market and the many households who depend on it. We are taking steps to ensure that it is well positioned to take on new responsibilities, if asked, as this period of change continues.
In 2019, Ginnie Mae reported more than $450 billion in MBS issuances, lifting our total outstanding MBS to nearly $2.1 trillion and providing affordable housing finance to approximately 1.8 million households. Those numbers and the impact on homeowners across the country would not have been possible without the commitment of our Issuers, servicers, investors and other stakeholders.
Already in the first month of 2020, strong MBS issuance volume in January is picking up where 2019 left off. For the past five months, Ginnie Mae MBS issuance has exceeded $50 billion — the first time that has ever happened. This is a result of the combination of mortgage rates hovering around historic lows, lenders employing new technology and improved borrower marketing strategies.
We will continue to be vigilant about monitoring market data and Issuer performance and on guard against trends that could have negative implications for the Ginnie Mae MBS program. Loan prepayments, even at rapid levels, are not inherently problematic if they clearly relate to market conditions and reflect the ability of homeowners to improve their financial situation. In order to address lending practices that have unhealthy effects, Ginnie Mae and the Department of Veterans Affairs (VA) have taken several policy actions in recent years; we are currently evaluating the impact of these steps and will consider additional steps if they seem warranted.
Our embrace of new technology, such as Robotic Process Automation and digital mortgages, signals that Ginnie Mae is changing, even as important aspects of our business remain constant. As execution of our “Ginnie Mae 2020” agenda continues throughout the year, we will improve the way users access core applications and deliver single-family pools. Ginnie Mae will also publish new e-mortgage rules related to digital collateral in our MBS Guide this year, as well as initiate an accompanying policy program test. Looking further down the road, we have started to plot the path toward the transition to loan-level program functionality that we committed to in the Housing Finance Reform Plan from the Department of Housing and Urban Development (HUD).
Our attention to risk management remains firm as well, as we continue to refine our program to model the impact of stressed economic environments on the institutions whose performances we guarantee. We are also working on establishing program requirements about resolution planning to better equip us for large-scale institutional failures
Moving into 2020, the industry can be reassured that Ginnie Mae will continue pushing forward in our mission. Not only are we listening to our Issuers, servicers and investors and keeping an eye on managing risk to taxpayers, but we’re holding true to our goal of serving American homeowners and renters by being the most efficient conduit possible for the delivery of global capital.