The Mortgage Bankers Association (MBA) this week published a proposal for Ginnie Mae to develop a new mortgage securitization product that could boost the availability of private capital liquidity sources into the market, particularly in periods of stress for the U.S. economy.
Importantly, the association said that the recent development of Ginnie Mae’s new, complementary Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) product — known as “HMBS 2.0” — could serve as a “logistical template” for such a product.
Proposal and inspiration
“Unlike a typical Ginnie Mae security based on pools of insured or guaranteed residential mortgage loans, the Ginnie Mae [early buyout (EBO)] security would not be based on a modified pass-through structure,” the MBA said in a white paper that outlined the proposal. “Instead, it would be similar to Ginnie Mae HMBS (backed by FHA-insured reverse mortgage loans), where the investor is paid an accrued sum at the time the loan resolves.”
The proposed product “would expand liquidity for government servicing through all economic cycles,” according to MBA president and CEO Bob Broeksmit. “An EBO security addresses the timing mismatch within Ginnie Mae’s program, helping to alleviate an ongoing issue that has concerned issuers and regulators alike.”
This is partially aligned with some of the stated goals offered up by Ginnie Mae for HMBS 2.0, from the initial announcement of its development at the beginning of this year through the release of a final term sheet late last month.
HMBS 2.0 is designed to enable the acquisition of loans from an HMBS pool above the existing 98% maximum claim amount (MCA) requirement. This would aim to address liquidity challenges that plagued the reverse mortgage business stemming from the late 2022 bankruptcy of a major lender, the run-up in interest rates and a precipitous drop in loan volume.
MBA detailed some of its reasoning for looking to the existing HMBS program and HMBS 2.0 as potential paths for its new proposal.
“Ginnie Mae […] has a very recent precedent for guaranteeing securities without a monthly cash flow and with an uncertain duration,” according to the white paper. “Its HMBS program similarly provides issuers with the option to purchase [HECM] loans out of their original pool and re-pool them into a new class of security, providing operating liquidity until the issuer has resolved any issue with the loan that prevents its assignability to FHA.”
Therefore, HMBS 2.0 could serve as something of an example for Ginnie Mae to observe.
“We believe the rollout of the new HMBS 2.0 program could provide a logistical template for Ginnie Mae staff as they establish the terms and criteria of a potential EBO securitization product rollout,” the paper said.
The trade group acknowledged that investor demand for such a product is likely to be small, but this doesn’t mean it couldn’t make a difference.
“We expect this program would have a small but not insignificant trading volume, with investor profiles similar to investors in the HMBS program and with sufficient demand from the warehouse lending community alone to ensure the market remains liquid and viable when it is needed most by the issuer,” MBA explained.
Reverse response: ‘You’re welcome’
When asked about the possibility of HMBS 2.0 serving as a template for the EBO proposal, New View Advisors partner Joe Kelly said this is something his firm recently touched on in one of its blog posts. It describes how the HECM/HMBS program “has gone from a program to eliminate to a program to emulate,” Kelly said.
The proposed MBA program shares some objectives and aspects of HMBS 2.0 — particularly in “providing liquidity for defaulted FHA-insured loans” — but also has necessary discrepancies due to the differences in collateral for each program.
“HMBS have the 98% maximum claim assignment buyout, and forward mortgage Ginnie Mae pass-throughs don’t,” Kelly said. “HECMs don’t have a scheduled monthly payment, so advances under the HMBS program are much less onerous. As the white paper explains, FHA-insured forward mortgages require servicer advances of monthly scheduled principal and interest. This creates a timing mismatch that is especially problematic for defaulted loans.”
Based on the white paper, the cash-flow timing mismatch “has always been an inherent problem in the program, but the need for a solution is greater than ever due to the increased reliance on independent mortgage banker (IMB) participants in the program,” Kelly said.
While a similar reliance exists in reverse, Kelly said, the underlying question centers on why banks have largely retreated and what it would take to get them reengaged in the mortgage business.
“In the wake of the banks’ retreat, the mortgage finance system must increasingly rely on the daisy chain of warehouse lenders, independent mortgage banks and tailored structured finance solutions,” Kelly said. “These solutions include new securitization programs like HMBS 2.0 and the program the white paper proposes, which, by the way, seems sensible.”
In that case, if the MBA proposal “really was inspired by HMBS 2.0, then, you’re welcome, forward mortgage industry,” Kelly said.
