At the 2019 Ginnie Mae Summit, Issuers, investors and industry participants convened to discuss topics ranging from our modernization efforts, to our recent efforts to mitigate counterparty risk, to broader topics, such as the general outlook of mortgage-backed securities. These are important conversations to be had – and it is not often that the mortgage industry gathers in one place for discourse about the future of the industry.
Our goal for the Summit was not just to engage in discussion for the two days of the event, but to start conversations that would be continued for years to come. We look forward to continuing the discussion at the MBA Annual this October and other upcoming events.
Today, we published an All-Participants Memorandum (APM) addressing pooling requirements for Veterans Administration (VA) refinance loans. Some of the items are necessary for the enactment of legislation, but one is a new restriction on the pooling of VA cash-out refinance loans — namely, limiting the securitization of such loans with LTV’s greater than 90% to custom securities. This APM coincides with the Federal Housing Administration’s announcement of a reduction in the allowable cash-out refinance limit in the program from 85% to 80%.
Ginnie Mae described its reason for considering restrictions on VA cash-out refinance lending in the Request for Input (RFI) published in May. The RFI articulated the concern that faster prepayment speeds for VA cash-out refinance lending were harming the market value of the Ginnie Mae II MIP securities and negatively impacting other types of loans included in the securities. The response to the RFI did not alter this point of view.
The 90% threshold reflects an attempt to balance the need to protect the security with the desire to support a broad lending benefit to veterans. The more aggressive action would have been to require that VA cash-out loans adhere to the same standard as FHA cash-outs (now 80%). Instead, Ginnie Mae chose a more limited approach.
We recognize this new restriction could have an impact on the pricing of high-LTV VA cash-out loans. However, the following points should be kept in mind:
The development of a transparent, liquid market for cash-out loans, securitized through custom pools, is an objective that will be supported by Ginnie Mae. The other alternative paths for excluded cash-outs identified in the RFI were not strongly supported in the RFI responses and will not be pursued at this time.
Continued achievement of Ginnie Mae’s mission — to ensure housing affordability for the full spectrum of borrowers served by the federal homeownership programs — requires continual balancing of the interests of various participants and beneficiaries.
In this instance, Ginnie Mae’s determination was that the market penalty, which results from the relative propensity of VA cash-out refinances to pay off very quickly, is harmful to other borrowers financed via the GII MIP and that bringing the allowable LTV threshold closer to that which prevails in most other segments of the industry is the fairest approach to the problem.
Ginnie Mae continues to collaborate closely with the VA on this topic and stands ready to adjust its program requirements as warranted by VA’s continued work on the issue or by other developments.
Over the past 18 months, we’ve taken a number of steps to combat lending practices that harm the market predictability of Ginnie Mae mortgage-backed securities (MBS) and increase the cost to borrowers financed by the government mortgage programs Ginnie Mae supports. Loan-level data analysis and input provided by investors directly and clearly indicates that the Ginnie Mae II Multi-issuer Program (GII MIP) securities, backed by selected Veterans Affairs (VA) mortgages, are susceptible to refinance activities out of proportion to what should be expected from prevailing interest rates. In addition to their effect on Ginnie Mae MBS, such refinancing practices can negatively impact borrowers’ financial situations.
Deterioration in the pricing of our GII MIP securities translates directly into a higher cost of homeownership for the homeowners the Ginnie Mae MBS program is intended to serve, including all VA, FHA and USDA borrowers. Therefore, it’s vital we take the steps necessary to protect the value of the Ginnie Mae security. Doing so will ensure the lowest possible rates for all borrowers in the program and protect VA borrowers from excessively high borrowing costs.
As part of this effort, we’re evaluating whether to exclude or restrict certain categories of loans that have shown the tendency to pay off faster than loans originated under more restrictive FHA, Fannie Mae or Freddie Mac loan-to-value (LTV) policies. For example, we’re taking a targeted look at VA cash-out refinances in excess of 90%. To support our evaluation, we’ve issued a request for input to solicit thoughts from stakeholders about the impacts of potential changes.
We know placing restrictions on any loan category has implications for borrowers, our Issuers and, ultimately, investors in our security. Because of this, we’re seeking guidance, which we will review carefully.
The RFI seeks insight into:
Ginnie Mae has the authority to implement requirements for acceptable loan characteristics on mortgages issued into our securities if we believe doing so is essential to the overall effectiveness of the MBS program. We’re committed to using in-depth analysis and evaluation to make educated decisions that will help protect the price of the security. Maintaining the value of Ginnie Mae securities in the market is the surest way for us to help keep mortgage rates low for American homeowners.
Read the request for information.
Respond to the request by emailing firstname.lastname@example.org no later than 3 pm Eastern Time on May 31, 2019. Responses will be kept confidential and will not be made available to the public.
Registration and hotel accommodations are filling up fast, so be sure to book soon: https://bit.ly/2K1hL2r
Every time Ginnie Mae takes a step to strengthen the value, performance and desirability of our security, we have one goal in mind: expanding homeownership in America. It’s at the heart of our mission and what we were created to do.
Protecting the Ginnie Mae security ensures liquidity in the market, accessibility for borrowers and stability for investors.
Expanding global market awareness and overseas demand for Ginnie Mae mortgage-backed securities is one way we are increasing liquidity. That helps lower costs and expand opportunity for low- and moderate-income borrowers. Ensuring investors have confidence in the Ginnie Mae security is paramount to the functioning of the U.S. system of housing finance in which we play such an important role. In doing so, we’re able to increase global capital flows in support of the U.S. housing market. At the end of February, foreign investors held almost 24 percent of Ginnie Mae MBS.
To understand why protecting our security is so critically important to Ginnie Mae and our mission, we point to the reasons the U.S. Congress established our agency in 1968. Congress chartered Ginnie Mae to perform five primary functions:
In other words, responding to concerns about security protection is not just a top priority for us. It’s our statutory obligation as we continue to innovate new solutions to minimize risk for participants in the secondary market.
Ginnie Mae is committed to eliminating the problem of prepayment speeds that evidence material deviations from market norms and without reasonable connection to economic fundamentals. We are working with issuers to highlight responsible lending practices that will not only have a positive impact on the borrowers they serve, but also protect our security — which helps the entire housing-finance ecosystem.
The Ginnie Mae program has enjoyed 50 years of success despite significant changes in the market for mortgage finance. This success has been achieved with the support of market participants cognizant of the need for Ginnie Mae to evolve its approach to changed circumstances. The advent of continuous monitoring of prepayment performance and the adoption of policy changes necessary to protect our security is another significant step in the development of the program. Our work is not done. We are fully committed to eradicating concerns about market instability that excessive prepayment speeds create so that investors can confidently rely on a more market-predictable security, in order to serve borrowers with safe, affordable and sustainable mortgage financing.