Ginnie Mae’s Home Equity Conversion Mortgages (HECM) Mortgage-Backed Securities (HMBS) Program serves as the securitization outlet for FHA-insured HECM. Originated by private lenders, HECMs allow low- and moderate-income older homeowners to access the equity in their homes to pay for living and other expenses. Ginnie Mae Issuers use proceeds from the HMBS securitization to finance disbursements to borrowers.
One of the requirements of the HMBS program is that the HECM loan must be purchased out of the pool when the outstanding balance reaches 98 percent of the Maximum Claim Amount (MCA). The MCA is either the value of the home or FHA’s maximum loan limit for the area, whichever is lower. Subsequently, Issuers can assign the loan to FHA, subject to certain requirements. Once the mortgage is placed in HUD’s Secretary-held portfolio, FHA takes over loan servicing and disburses funds to the Issuer.
For this process to work seamlessly, the Issuer must be able to finance the HECM buy-out from the HMBS security until the assignment is complete. This process usually takes a few months. HECMs with incomplete documentation or with delinquent real estate taxes or homeowners insurance premiums are not assignable to HUD until the delinquency or document deficiency is rectified or the loan is resolved via home sale or foreclosure. This process can take longer—even years. This necessitates a stable source of liquidity available over the medium- to long-term and through economic cycles. One of the largest HECM Issuers became insolvent in early 2022 when interest rates spiked and liquidity dried up.
A second challenge is the slowdown in HECM origination volume since 2022. Revenues from the origination of new HECMs tend to be strong in the early years when securitization helps finance borrower draws and allows Issuers to earn a spread. As the portfolio seasons, draws become smaller, and earned revenue declines. At the same time, cash demands increase due to the mandatory buy-out requirement at 98 percent of MCA.
Many seniors obtained HECMs when rates were low during the decade before 2022. Origination and issuance volumes were robust, and the lending industry remained healthy. Since 2022, origination volumes and revenues have declined substantially. At the same time, outstanding HECM loans have begun approaching the 98-percent limit in substantial numbers. This confluence of factors creates significant liquidity needs for the industry. Unless addressed proactively, this can lead to future disruption in the HECM market.
How is Ginnie Mae addressing this?
Ginnie Mae is committed to maintaining a well-functioning HMBS program that meets the needs of older Americans. We have been proactively working with our partners and stakeholders to identify ways to address these issues. Based on these discussions, we have concluded that a new securitization pool type is needed to make it easier for Issuers to access liquidity in certain circumstances.
Today, we are releasing a
term sheet for a proposed HMBS 2.0 program to enable the pooling of active and nonactive buy-outs into new custom, single-Issuer pools for public comment. HMBS 2.0 will permit the pooling of HECMs with an outstanding unpaid principal balance (UPB) of no less than 98 percent and no greater than 148 percent of MCA. HMBS 2.0 will also provide Issuers with an incremental source of servicing income to ensure that customer service operations can sustainably meet the needs of borrowers requiring assistance. The proposal includes several provisions to mitigate the posed incremental risks. These include—
- The amount that can be pooled into HMBS 2.0 shall be limited to 95 percent of the HECM UPB. The 5-percent buffer is designed to create an additional economic incentive to protect Ginnie Mae and taxpayers against a decline in collateral value.
- Although HMBS 2.0 will permit various property valuation methods, including appraisals issued within the most recent 2 years, AVM valuations from approved vendors, or an independent broker’s price opinion, they will be factored in at 90 percent. The 10-percent buffer will protect Ginnie Mae in the event of a variance between the estimated property value and the market value or a future decline in house prices.
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Eligible HECMs must have an Adjusted Property Value Ratio that is no greater than 60 percent; this requirement will cap the amount that can be pooled into HMBS 2.0; this will help limit leverage and offer additional risk mitigation for taxpayers.
- Issuers are responsible for repurchasing loans from HMBS 2.0 pools when the outstanding loan balance reaches 150 percent MCA, the loan is assigned to HUD, or the HECM note is terminated, whichever comes first.
Access to liquidity under HMBS 2.0 will give Issuers time to resolve issues that prevent HECMs from being assigned to FHA. This access will relieve immediate liquidity stress and reduce the likelihood of Issuer default and portfolio extinguishment where Ginnie Mae is required to step in and take over the portfolio from an insolvent Issuer. This process, in turn, would help improve investor confidence in the HMBS market and support HECM MSR values.
A complete description of the terms for HMBS 2.0 is available in the term sheet at
https://www.ginniemae.gov/newsroom/publications/Documents/ginniemae_HMBS_Term_Sheet.pdf. The term sheet is available for public comment for 30 days. Comments, attachments, and supporting materials are subject to public disclosure without change. Proprietary information or sensitive personal information should not be included. Comments will not be edited to remove such information. Please send all comments to
GinnieMaeHMBS@hud.gov.