Housing Finance at a Glance: Monthly Chartbooks
The August 2020 edition of At A Glance, the Housing Finance Policy Center’s reference guide for mortgage and housing market data, includes updated figures describing first lien origination volume, cash-out refinances, loans in serious delinquency and mortgage insurance activity.
Ginnie Mae Eliminates Servicer Loophole that Hurts Investors
Institutionalized forbearance has helped many homeowners who cannot pay their mortgages remain in their homes, including 9.5 percent of those with a Ginnie Mae mortgage. But it’s also caused an enormous spike in the rate that Ginnie Mae servicers are removing loans from securitized pools. In many instances, servicers are removing non-performing loans from pools and quickly delivering the same loans to new pools once the borrower has begun making payments again, bringing unexpected profits to the servicer. In response to this legal but unintended profit-making opportunity, Ginnie Mae instituted a new “temporary” restriction, effective July 1st, 2020, that limits the ability of servicers to re-pool forborne loans that have been purchased out of the existing pool. While this action by Ginnie Mae makes sense, it reduces the flexibility servicers have to work with troubled borrowers.
Since January 2019, mortgagor payoff has been the main reason for removing loans as refinance activity has soared amid record low mortgage rates. In June 2020, a new category of removals - Repurchase of Delinquent Loans – more than quadrupled, accounting for about one-third of total removals. However, these repurchases fell in July and its share of all removals shrank.
The increase in the repurchase of delinquent loans through June was a direct result of increases in mortgage forbearances which began in March, 2020. Mortgage forbearance puts servicers in a bind since they are required to pay a loan’s principal and interest (P&I) to investors as long as the loan remains in a security, even if the borrower is in forbearance. To avoid making these P&I payments, servicers can buy the mortgage out of the securitized pool (“Repurchase of Delinquent Loan”.) When a servicer purchases a loan out of the pool, they must fund the loan, but this is often less costly than continuing to make the P&I payments.
Ginnie Mae policies allow a servicer to purchase a 90 day or more delinquent mortgage out of a securitized pool at par (i.e. 100), even if the mortgage pool was selling above par (i.e. at 105) as many mortgage-backed securities have been. Once the borrower begins paying again or “re-performing” on the loan, the servicer could just return the loan to a different Ginnie Mae pool, selling it at the higher price and collecting the premium. Forborne loans are far more likely to re-perform than loans that go delinquent under other circumstances. Some servicers were pulling loans out of pools as soon as they could, including loans that they had reason to believe would re-perform quickly, so they could take advantage of this unintended profit.
Ginnie’s change in policy, effective July 1, 2020, forever prohibits re-pooling forborne loans in the most desirable Ginnie II securities. As of July 1, 2020, once seven months of on-time payments have been made on the removed loan, the loan can be delivered into a new custom pool that will have much worse liquidity, and likely sell at a lower price than the Ginnie II securities. This new policy makes sense as a way of curbing a loophole that hurt investors. At the same time, flexibility to work with troubled homeowners is somewhat curtailed if the new policy reduces the willingness of servicers to repurchase these delinquent loans.
As we deal with an unprecedented crisis, we need to keep a close eye on the data to make sure we understand the intended and unintended results of policies and all of the trade-offs involved.
July 29 Chartbook call featuring Amy Crews Cutts; Slides from Amy Crews Cutts and Chartbook Slides
January 29th Chartbook call featuring Bob Broeksmit and Mike Fratantoni.
July 2019 (watch the July 29 chartbook call with guest Richard Green)
April 2019 (watch the April 29 chartbook call with guest Dave Stevens)
January 2019 (watch the January 30 chartbook call with guest Dave Stevens)