Ginnie Mae announced it is considering steps to address the high prepayment levels it is seeing in its loan pools. For consideration is the potential for VA cash-out refinances in excess of 90% loan-to-value to be excluded, or restricted, from the multi-issuer pools, given their poor performance history in the securities and the program requirements differences relative to FHA and the GSE’s.
The Ginnie Mae II Multi-Issuer Program (GII MIP) represents nearly one-third of agency mortgage-backed security (MBS) issuance. One of the key features distinguishing the GII MIP is the fact that it is an aggregation of production from a wide variety of lender/ servicer issuers and is comprised of a broad base of loan characteristics.
Purchasers of GII MIP securities have invested in a pro-rata share of large mortgage poolsthat are representative of current production within the government-insured or guaranteed lending sector. Strong market acceptance of the GII MIP has been critical in enabling Ginnie Mae to fulfill its mission of facilitating low- cost financing for American homeowners and the federal housing finance programs it’s intended to serve.
The actual and projected extent of loan prepayment is a primary concern of MBS investors and analysts, particularly when an above-par price has been paid for the security in which the prepayment occurs. Prepayment risk is a well-understood feature of the MBS asset class and is the subject of extensive loan-level analysis that supports the liquidity of the securities. However, for security investors, concerns arise when investment losses are borne as the result of refinance activity that appears not to correlate with economic fundamentals.
The initial review indicates that VA cash-out refinance loans have a particularly high propensity to prepay rapidly in large part because the LTV requirements for cash-out refinances in the VA program are different from those of the FHA program and the government-sponsored enterprises (GSEs).
Two areas for consideration arise from Ginnie Mae’s analysis. One concerns the need to ensure that loans made serve the interests of the veteran homeowners. The second issue concerns the extent to which the more lenient VA requirements are fostering short-term borrowing patterns that are at odds with the purpose of the GII MIP program. Ginnie Mae’s view of the GII MIP products is that they are intended for loans in which the average lifespan can be expected to align with ownership of a property, adjusted for the periodic opportunity to improve loan terms when interest rate cycles permit. Cash-out refinances serve a role for borrowers, but traditionally only on a smaller scale, as the FHA and the GSEs require more stringent loan-to-value ratios for cash-out refis relative to the VA program.
Ginnie Mae is confronting a situation in which the GII MIP, because of the combination of greater volume of VA loansand present-day borrowing/lending practices, is being utilized to support short-term consumer financing for veterans to a greater degree than has previously been the case. As noted earlier, this situation may be having an adverse impact on the prices paid for these securities, and thereby resulting in cross-subsidization of high-LTV cash-out refinancing by the residual FHA, VA and United States Department of Agriculture (USDA) borrowers whose loans are commingled in the GII MIP.
Ginnie Mae is therefore evaluating the possibility of excluding from (or restricting within) the GII MIP loan type categories that can be expected to prepay at significantly higher rates from the loan types whose performance is better correlated with market trends and the intended purpose of the GII MIP securities.
Ginnie Mae has the right to overlay its own requirements about acceptable loan characteristics on to those of the insuring/guaranteeing agencies when it deems the performance of the Ginnie Mae MBS securities is being negatively impacted.
An additional topic for consideration is the securitization path for excluded (or restricted) loan type categories. In accordance with its mission, Ginnie Mae would seek to provide an alternative securitization path that provided for liquidity to the maximum extent possible, while also providing full market transparency.