I Mortgage Bankers Association (MBA) this week published a proposal that Ginny Mae developing a new mortgage securitization product that would increase the availability of private equity funds in the market, especially during times of stress in the US economy.
Importantly, the association said the recent development of Ginnie Mae’s new product, the Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) — known as “HMBS 2.0” — could serve as a “planning template” for such a product.
Suggestion and motivation
“Unlike Ginnie Mae’s traditional pool-based coverage of insured or guaranteed mortgage loans, Ginnie Mae [early buyout (EBO)] security will not be based on a modified pass-through framework,” said the MBA in a white paper outlining the proposal. “Instead, it will be like Ginnie Mae HMBS (backed by The FHA-insured reverse mortgage loans), where the investor is paid a lump sum when the loan settles.”
The proposed product “could increase revenue for the government throughout economic cycles,” according to MBA president and CEO Bob Broeksmit. “EBO’s security addresses the timing irregularities in Ginnie Mae’s system, helping to alleviate an ongoing problem affecting issuers and regulators alike.”
This is consistent with the specific goals that Ginnie Mae has outlined for HMBS 2.0, from the initial announcement of its development earlier this year to the release of the final term sheet late last month.
HMBS 2.0 is designed to enable the acquisition of loans in the HMBS pool in addition to the existing 98% maximum claim amount (MCA) requirement. This will be aimed at addressing the liquidity challenges that have plagued the mortgage business as a result of the late 2022 bankruptcy of a major lender, falling interest rates and falling loan prices.
The MBA explained some of its reasons for looking at the existing HMBS system and HMBS 2.0 as possible alternatives for its new proposal.
“Ginnie Mae […] has the latest example of guaranteeing securities without monthly cash flow and uncertain term,” according to the white paper. “Its HMBS program similarly gives issuers a buying opportunity [HECM] the loans are taken out of their original pool and refinanced into a new class of securities, providing working capital until the issuer resolves any problem with the loan that prevents it from being assigned to the FHA.”
Therefore, HMBS 2.0 could be a model for Ginnie Mae to look at.
“We believe that the release of the new HMBS 2.0 system may provide a working template for Ginnie Mae staff as they develop the terms and conditions for the release of a potential EBO product,” the paper said.
The trade group acknowledged that investor demand for such a product may be low, but this does not mean it will not make a difference.
“We expect this program to have a small but insignificant amount of trading, with investor profiles similar to investors in the HMBS program and sufficient demand from the warehouse lending community only to ensure that the market remains fluid and active when the issuer is most in demand,” explained MBA.
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 My partner Joe Kelly said this is something his company recently touched on in one of its blog posts. It describes how the HECM/HMBS program “went from program to program to be modeled,” Kelly said.
The proposed MBA program shares some of the objectives and features of HMBS 2.0 — particularly in “providing FHA-insured mortgages” — but also has necessary differences due to differences in each program’s collateral.
“HMBS has a 98% higher claim acquisition rate, and Ginnie Mae pass-through does not pass,” Kelly said. “HECMs do not have a fixed monthly payment, so advancing under the HMBS system is not too difficult. As the white paper explains, FHA-insured home equity loans require service advances of scheduled monthly principal and interest. This creates a time conflict which is especially problematic for bad loans.”
Based on the white paper, cash flow timing conflicts “have always been an inherent problem in the system, but the need for a solution is greater than ever due to increased reliance on private mortgage bank (IMB) participants in the system,” Kelly said.
Although mutual trust is back, Kelly said, the fundamental question centers on why banks have withdrawn so much and what it would take to re-engage in the lending business.
“After the withdrawal of the banks, the credit system must rely more on a chain of mortgage lenders, private securities banks and structured finance solutions,” said Kelly. “These solutions include new systems to ensure security such as HMBS 2.0 and the system proposed by the white paper, which, by the way, seems reasonable.”
If so, if the MBA proposal is “really inspired by HMBS 2.0, you’re welcome, move the mortgage industry forward,” Kelly said.
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