Ginnie Mae is today announcing
final term-sheet for a newly proposed Home Equity Conversion Mortgage (HECM) securitization program, HMBS 2.0, to facilitate greater liquidity in the HECM market. This final term sheet was developed in response to comments received and subsequent engagement with stakeholders as part of a public comment period following the
release of the draft term sheet in June.
The primary objective of HMBS 2.0 is to mitigate Issuers’ liquidity stress when HECMs bought from traditional HECM Mortgage-Backed Securities (HMBS) pools cannot be immediately assigned for an insurance claim to the Federal Housing Administration (FHA) because of incomplete documentation, a borrower in default status, or the property is in disrepair. Under the proposal, active and nonactive HECM buyouts with an outstanding principal balance of no less than 98 percent and no greater than 148 percent of the Maximum Claim Amount would be eligible for pooling into new custom, single-issuer pools subject to meeting additional individual loan requirements. The following section provides a summary of key elements of the final term sheet.
Final Term Sheet Discussion
Ginnie Mae held substantial stakeholder engagement in developing the final terms for HMBS 2.0 and appreciates the industry’s cooperation and feedback. Ginnie Mae carefully analyzed the feedback received and made changes where possible. In some cases, Ginnie Mae was able to make partial changes and retained the original proposal in others. The following describes key highlights of the revised term sheet.
95 Percent Maximum Pooling Participation
The proposed term sheet capped the maximum participation unpaid principal balance (UPB) for HMBS 2.0, inclusive of tail participations, at 95 percent of eligible HECM UPB. The 5-percent buffer creates an economic incentive for Issuers to protect Ginnie Mae and taxpayers against a decline in collateral value. The industry requested that Ginnie Mae raise this threshold to 100 percent, with a 5-percent risk retention requirement for Issuers.
Ginnie Mae considered this suggestion and determined that a 100-percent threshold would erode the economic incentive for Issuers because Ginnie Mae would guarantee the 5-percent risk retention strip. Accepting this recommendation would increase Ginnie Mae’s risk exposure in the event of a decline in collateral value. In addition, Ginnie Mae lacks the tools to validate and monitor ongoing compliance with Issuers’ risk retention. Accordingly, Ginnie Mae is finalizing the proposed maximum participation UPB for HMBS 2.0, including tail participations, at 95 percent of eligible HECM UPB.
Securitization of Loan Advances
Due to the mandatory buyout requirement under the original HMBS program, Issuers require liquidity for HECM loans that cannot be immediately assigned to FHA until their final disposition. Each month, an Issuer must pay FHA a mortgage insurance premium and other loan advances, which accrue over time but are not reimbursed until disposition. Accordingly, commenters had requested that all loan advances be made eligible for HMBS 2.0 securitization. After thoughtful consideration, Ginnie must remain consistent with existing policies regarding loan advances, meaning that 95 percent of the accumulated balance of an HECM loan may be pooled as the initial participation for HMBS 2.0. Subsequent HECM 2.0 participations may consist only of loan advances as defined in the MBS Guide.
Pool Certification Requirements
Feedback on this topic included requests for the following changes to documentation requirements:
- The purpose of HMBS 2.0 is to support liquidity for seasoned HECMs that have not or cannot be assigned to HUD. For HECMs in foreclosure, the legal documents are often unavailable to send to the document custodian. Generally, such documents are held by the foreclosure attorney in the case of bailee letters or by the court in the case of court documentation. Both the bailee letters and court documentation describe why, where, and by whom the legal documents are being held. Because HMBS 2.0 is designed for and is the only Ginnie Mae program that accepts nonactive loans, Ginnie Mae will permit bailee letters or court documentation as substitutes for the promissory note at initial HMBS 2.0 certification.
- Again, due to the seasoned nature and the nonactive status of HMBS 2.0-eligible HECM loans in many cases, there may be times when the original note is lost. In such instances, commenters requested that Ginnie Mae accept a Lost Note Affidavit as a substitute for the original note. Ginnie Mae concluded that a Lost Note Affidavit does not provide adequate assurance because it may not be accepted in all jurisdictions. However, Ginnie Mae will permit Issuers to submit a Lost Instrument Bond. A Lost Instrument Bond is a Surety Bond that protects against financial loss, whereas an affidavit carries no such insurance. This provision is consistent with the risk parameters of the original HMBS program and Ginnie Mae’s single-family program.
- Commenters requested that Ginnie Mae allow endorsements and assignments when the chain is imperfect (“wild” endorsements and assignments). An endorsement or assignment chain demonstrates the chain of ownership from the originating lender to the current HECM holder. If that chain is broken because the loan was endorsed or assigned to two different parties, the issue must be resolved for the title to be cleared and assigned to FHA, which presents undue financial risk to Ginnie Mae should it become the holder of such loans. Ginnie Mae requires a complete chain of endorsements and assignments for all of its Mortgage-Backed Securities programs and has decided to also require them for HMBS 2.0.
Maximum Adjusted Property Value Ratio (MAPVR)
The industry’s feedback requested that the MAPVR for HMBS 2.0 eligibility be determined at the time the HECM loan is bought out of the original HMBS pool. This request is because the loan could be compliant with the proposed MAPVR of 60 percent when bought from the original pool but accrue above that level by the time of HMBS 2.0 pooling, rendering the loan ineligible. Alternatively, if the MAPVR is calculated at the time of HMBS 2.0 pooling, the industry requested that the maximum MAPVR be raised to 80 percent. The industry also sought clarification from Ginnie Mae on whether the MAPVR calculated at the time the loan is first pooled under HMBS 2.0 would remain valid for subsequent HMBS 2.0 participations.
Based on this feedback and additional analysis, the revisions for the MAPVR requirement for HMBS 2.0 under the final term sheet are— ;
A 70-percent maximum MAPVR for HECM loans bought out of the original HMBS pool prior to the implementation date of HMBS 2.0.
A 60-percent maximum MAPVR for all HECM loans bought out of the original HMBS pool at or after the implementation date of HMBS 2.0.
Ginnie Mae confirms that the MAPVR determined at the time of initial HMBS 2.0 pooling will be valid for subsequent HMBS participations.
These new HMBS 2.0 pools, backed by Ginnie Mae’s full faith and credit guaranty, will allow Issuers to access durable liquidity at lower funding costs, permit a one-time securitization of accumulated loan advances, and continuously monetize certain loan advances, such as servicing spread and FHA mortgage insurance premiums. These changes will also improve the economic value of existing HMBS mortgage servicing rights. The final term sheet retains important provisions to mitigate incremental taxpayer risk from HMBS 2.0 while ensuring that loan servicers can continue to provide senior citizens with the financial benefits of the HECM program. Collectively, HMBS 2.0 will provide more certainty to the marketplace and result in a more stable HECM market for seniors, Issuers, and HMBS investors.
Explore the details of the final term sheet.
Read the HMBS 2.0 press release.