Ginnie In Brief
|Understanding Key Points about Counterparty Policy in APM 19-06|
|by Michael Drayne | 8/22/2019|
In 2018, Ginnie Mae
developed a set of revisions to the MBS Guide’s treatment of counterparty risk,
updating what is required to ensure the overall financial health of the
Issuers who make guaranteed pass-through payments to Ginnie Mae MBS investors. The
revisions are published in three installments: The first two came in November
2018 (APM 18-07) and
March 2019 (APM 19-02), and
Ginnie Mae is releasing the third today in the form of APM 19-06.
This post provides useful information about a few of the
items in APM
19-06, reflecting views about counterparty risk that we want to be sure
Issuers and other stakeholders understand. Each of these policy enhancements
was originally highlighted in the “Ginnie
Mae 2020” report in 2018.
Risk Parameters. We have increasingly
incorporated additional guidance about risk into the MBS Guide. A prime example
is Chapter 3, Part 21, Section B, which describes acceptable risk parameters,
as well as situations that may represent departures from acceptable
In APM 19-06, we add a new item to the list of situations of concern:
Secured debt that is greater than 60% of gross tangible assets. This metric,
which is utilized in rating agency methodology, is important because an
institution whose assets are heavily encumbered has less flexibility to use
them to raise liquidity, should the need arise. While we are not stating a
preference for unsecured debt nor are we establishing 60% as a hard compliance
threshold, we are putting Issuers on notice that this metric is being closely
monitored and that secured debt in excess of the stated level could impact
future program management decisions.
Concentration. Similarly, in Chapter 4,
Part 8 and Chapter 21, Part 3, we introduce concentration of servicing or
subservicing as a factor that could be included in our evaluation of a
servicing transfer or subservicing approval request. This reflects the widely
held view that concentration risk is a fundamental concern of portfolio
management. Currently, Ginnie Mae does not have market share limits for Issuers
or subservicers, and none are imminent. However, as the residential finance
landscape continues to evolve, this issue needs to be part of the dialogue and,
accordingly, we have introduced it to the MBS Guide. We understand that policy
actions on this subject could have a significant impact on program participants
and should be developed with ample opportunity for input by stakeholders.
Required Ratings. Finally, we are
requiring that issuers whose portfolios exceed certain size thresholds obtain
external servicer or credit ratings, as explained in Chapter 3, Part 18. As
stated in “Ginnie Mae 2020,” we believe that “Issuers who attain a certain
level of prominence within the housing finance system should be expected to
make greater investments in transparency compared to other Issuers.” It is
likely that the required rating thresholds will be utilized in the
implementation of other policy actions in the future, since as we have said in
other places it is less appropriate than in the past to manage the MBS program
on a one-size-fits-all basis.
The publication of APM 19-06 concludes our planned
counterparty risk APM series, though we will certainly continue to work on this
subject and, as a result, see more changes to the MBS Guide.
Over the coming year, our efforts will be centered on the
three topics we identified in our recent “Progress
Update: Ginnie Mae 2020” report: Capital requirements, stress testing and
resolution planning report. These will help constitute a “holistic framework”
for managing counterparty risk as a guarantor and narrow the gap that exists
between the prudential regulation standards that apply to federally insured
banks and the various program standards that govern non-banks. These three
focus areas stand to be a major part of our dialogue with stakeholders in the
|Ginnie Mae Strengthens its Multi-Issuer MBS Program with New Pooling Requirements for VA Cash-out Mortgages|
|by Maren Kasper | 8/1/2019|
Today, we published an All-Participants Memorandum (APM) addressing pooling requirements for Veterans Administration (VA) refinance loans. Some of the items are necessary for the enactment of legislation, but one is a new restriction on the pooling of VA cash-out refinance loans — namely, limiting the securitization of such loans with LTV’s greater than 90% to custom securities. This APM coincides with the Federal Housing Administration’s announcement of a reduction in the allowable cash-out refinance limit in the program from 85% to 80%.
Ginnie Mae described its reason for considering restrictions on VA cash-out refinance lending in the Request for Input (RFI) published in May. The RFI articulated the concern that faster prepayment speeds for VA cash-out refinance lending were harming the market value of the Ginnie Mae II MIP securities and negatively impacting other types of loans included in the securities. The response to the RFI did not alter this point of view.
The 90% threshold reflects an attempt to balance the need to protect the security with the desire to support a broad lending benefit to veterans. The more aggressive action would have been to require that VA cash-out loans adhere to the same standard as FHA cash-outs (now 80%). Instead, Ginnie Mae chose a more limited approach.
We recognize this new restriction could have an impact on the pricing of high-LTV VA cash-out loans. However, the following points should be kept in mind:
- The new 90% threshold for veteran borrowers is still significantly higher than the threshold for non-veteran borrowers (under the FHA or Fannie Mae/Freddie Mac programs).
- Loans in excess of 90% are still eligible for inclusion in Ginnie Mae guaranteed securities, just not the GII MIP (because its vulnerability to volatile performance can affect pricing for a wide range of borrowers under the government-sponsored programs).
The development of a transparent, liquid market for cash-out loans, securitized through custom pools, is an objective that will be supported by Ginnie Mae. The other alternative paths for excluded cash-outs identified in the RFI were not strongly supported in the RFI responses and will not be pursued at this time.
Continued achievement of Ginnie Mae’s mission — to ensure housing affordability for the full spectrum of borrowers served by the federal homeownership programs — requires continual balancing of the interests of various participants and beneficiaries.
In this instance, Ginnie Mae’s determination was that the market penalty, which results from the relative propensity of VA cash-out refinances to pay off very quickly, is harmful to other borrowers financed via the GII MIP and that bringing the allowable LTV threshold closer to that which prevails in most other segments of the industry is the fairest approach to the problem.
Ginnie Mae continues to collaborate closely with the VA on this topic and stands ready to adjust its program requirements as warranted by VA’s continued work on the issue or by other developments.
|Taking a Custom Approach to Counterparty Risk|
|by Gregory A. Keith | 7/22/2019|
Private sector institutions, such as banks and other lenders, issue and service the mortgage-backed securities that Ginnie Mae guarantees. Our guarantee ensures that investors who own the securities are paid their principal and interest. If borrowers fail to make payments, Issuers are still required to remit scheduled payments to investors.
If a servicer fails to remit scheduled payments, though, the federal government, through Ginnie Mae, could be forced to intervene and make the payments. That’s known as “counterparty risk,” and there has been a paradigm shift over the past decade in the way that Ginnie Mae handles it.
At the recent Ginnie Mae Summit, I laid out our approach to limiting counterparty risk. We’re emphasizing engagement with Issuers, giving them tools to self-monitor their position against their peer group and utilizing various vehicles — on-site reviews, regular “spotlight Issuer” calls, periodic Issuer liquidity meetings — to make sure we have a strong understanding of Issuer business activities, and they have an understanding of how we are looking at things.
We know that working together is the best way to mitigate risk. We also know that a purely one-size-fits-all approach won’t best serve Issuers or Ginnie Mae. Because of the diversity of business models among our Issuers, we need to employ a tailored approach to ensure that potential risks, big or small, don’t fall through the cracks.
We’re now using advanced analytics to apply individual oversight to each Issuer. We are refining a newly-developed Issuer Stress Test model. The model uses a variety of data points to forecast an Issuer’s financial performance over the short- and medium-term under different economic scenarios. It provides a number of outputs, all of which give Ginnie Mae and our Issuers a view of where risk may emerge or grow. We use this forecasting to inform our work with Issuers.
For example, simpler ways of assessing counterparty risk look solely at the net worth of counterparties, using that measure as an indicator of how well an Issuer could weather a financial storm. In figure 1, both Issuers appear identical, equal to the task of withstanding an unexpected financial shock. However, when probed more deeply, another picture appears.
Given the size of their servicing portfolios, each Issuer is required to have a net worth of at least $6 million. However, meeting that threshold and having room to spare are two different things, as shown in figure 2.
One Issuer is clearly more leveraged than the other with significantly less overall equity available to manage unforeseen stresses. It would not be prudent for Ginnie Mae to assess these Issuers equally because one clearly is more of a risk to the agency than the other. Our customized counterparty risk tools dig deeper to reveal these potential exposures.
Broad-based capital and liquidity minimum standards are important, but the ability to take a more situational approach as well makes for a stronger risk management program. As always, our goal is to address risk appropriately before it adversely affects the ability of the Issuer to manage its Ginnie Mae business or has an impact on the system overall.
As we continue through 2019, our Issuers, servicers and other stakeholders can expect to hear more about our approach to measuring and managing counterparty risk, including steps we are taking to increase the flexibility of how holders of Ginnie Mae mortgage servicing rights (MSRs) can use the asset to enhance their liquidity and overall risk profile.
|Ginnie Mae’s Secured Overnight Funding Rate Transaction Explained|
|by John F. Getchis | 6/26/2019|
The transition away from the LIBOR index, and possible use of Secured Overnight Funding Rate (SOFR) as an alternative, has become a more prominent issue in 2019, as evidenced by a recent Ginnie Mae REMIC transaction that included some SOFR-indexed classes. Given the general interest in the issue, and some questions we received about this transaction, we thought it would be worth providing a detailed explanation on Ginnie Mae’s first-ever SOFR-indexed REMIC transaction.
In April 2019, Amherst Pierpont Securities LLC, one of Ginnie Mae’s approved Multiclass Securities Program Sponsors, sponsored a Multiclass Securities transaction, Ginnie Mae 2019-054, which included several Classes of securities indexed to a monthly calculated SOFR. The assets underlying those Classes consisted of Ginnie Mae-guaranteed, single-family MBS backed by Adjustable Rate Mortgages (ARMs) indexed to the U. S. Treasury One-Year Constant Maturity Treasury (CMT) index.
The SOFR-indexed REMIC Classes included in Security Group 6 of Ginnie Mae 2019-054 were:
- Class HF - $40MM Weighted Average Coupon/Floating Rate Pass-Through Class;
- Class HI - $40MM Notional Weighted Average Coupon/Interest-Only Pass-Through Class;
- Class IO - $40MM Notional Fixed Coupon/Interest-Only Pass-Through Class.
The $40MM SOFR-indexed bonds were a subset of an aggregate issuance of approximately $265MM of multiclass securities.
What it Was:
Ginnie Mae 2019-054 represents the first Ginnie Mae transaction in which the Sponsor created a SOFR-indexed security. The related Offering Circular Supplement (available on Ginnie Mae’s website) and transaction documents contained new sections for interest rate calculations, selection of the applicable SOFR and, under certain circumstances, selection of a replacement interest rate. These sections were informed by guidance of the Alternative Rate Reference Committee (ARRC), a Federal Reserve Board and NY Federal Reserve Bank-sponsored working group, with respect to SOFR.
The documents defined terms such as “SOFR Suspension Period” and “SOFR Reset Date” and described the method for determining a monthly average SOFR Rate from the daily posting of SOFR by the NY Federal Reserve. The Sponsor adopted a simple average calculation, rather than a daily compounding average, based upon the actual number of calendar days in the prior accrual period. The lookback period for averaging the daily rates is an “advance” method in which the SOFR rates are posted ahead of the bond’s next accrual period. The advance method is essentially a 30-day lookback from the beginning date of the next monthly accrual period.
The Sponsor, with Ginnie Mae’s approval, chose a simple average calculation because it conceptually matches the simple average method of the CMT One-Year Index so that Sponsors, REMIC Trustees, Ginnie Mae, Ginnie Mae’s Financial Advisor and the Information Agent can easily validate the monthly interest rate.
Sample Timeline of Ginnie Mae 2019-054 SOFR Calculation
||May 20 - June 19|
|SOFR Calculation Period
||April 20 - May 19|
|SOFR Suspension Period2
||May 16 - May 19|
|SOFR Disclosure Date
The Ginnie Mae 2019-054 SOFR provisions also included a base index waterfall that addressed SOFR unavailability. SOFR (or a replacement rate in certain specified circumstances) for each rate reset date is determined in the following manner:
SOFR is published by the Federal Reserve Bank of New York at approximately 8 a.m.;
If that rate is unavailable and if No SOFR Cessation Event or SOFR Cessation Date has occurred, SOFR is published on the immediately preceding date;
If a SOFR Cessation Event and SOFR Cessation Event have occurred, the replacement index is recommended by the NY Federal Reserve, provided Ginnie Mae and the Trustee have received a tax opinion that the related trust will not lose its REMIC status. Pending the tax opinion, the replacement rate is the Overnight Bank Funding Rate (OBFR) published by the Federal Reserve Bank of New York, provided Ginnie Mae and the Trustee receive a REMIC tax opinion with respect to OBFR;
If an OBFR Cessation Event and OBFR Cessation Date have occurred, the replacement index is the short-term interest rate target set by the Federal Open Market Committee and published by the Federal Reserve Bank of New York, or if the Federal Open Market Committee has not set a single rate, the midpoint of the short-term interest rate target range set by the Federal Open Market Committee, in either case, provided Ginnie Mae and the Trustee receive a REMIC tax opinion with respect to such rate;
If a rate cannot be established under the preceding waterfall, Ginnie Mae may select an alternative index, provided a REMIC tax opinion is received with respect to the alternative index; and
If a replacement rate cannot be established, the rate defaults to the last available SOFR.
The SOFR and OBFR Cessation Events and Cessation Dates are defined in the Ginnie Mae 2019-054 Offering Circular Supplement and generally relate to the unavailability of SOFR and OBFR.
Why We Accommodated the SOFR-Indexed Classes:
Prior to Ginnie Mae 2019-054, the array of indices available for Ginnie Mae transactions included only LIBOR, COFI, Prime, and various Constant Maturity Treasury indices. In Ginnie Mae 2019-054, SOFR was added at the Sponsor’s request. Ginnie Mae agreed to this request to facilitate the creation of offering and transaction documents necessary for a defined structure of SOFR-indexed securities. This process enabled investors to assess the merits of such securities, permitted transaction parties to allocate responsibilities with respect to the replacement index provisions, and allowed Ginnie Mae to establish the operational capabilities for a monthly SOFR rate. In addition, Ginnie Mae was pleased to foster efforts to develop a robust market for SOFR-indexed securities.
What it Wasn’t:
Ginnie Mae 2019-054 introduced new SOFR-indexed securities. The transaction also included separate LIBOR-indexed securities, but those LIBOR-indexed securities are not linked to the SOFR-indexed securities or SOFR provisions and do not address the replacement of LIBOR as an index if LIBOR becomes unavailable. For those LIBOR-indexed securities, if LIBOR becomes unavailable, the Trustee will propose a new index for approval by Ginnie Mae based upon comparable information and methodology if the Trustee receives appropriate tax opinions.
- Ginnie Mae 2019-054 was the first Ginnie Mae transaction to include SOFR-indexed securities;
- Ginnie Mae 2019-054 laid the groundwork for future Ginnie Mae transactions with SOFR-indexed securities; and
- The SOFR provisions included in Ginnie Mae 2019-054 provide for selection of replacement indices if SOFR becomes unavailable.
In conclusion, Ginnie Mae will continue to support Sponsor efforts to develop the market for SOFR-indexed securities. If SOFR, or any other index, is selected as the LIBOR replacement, the development of alternative index securities allows capital market participants to establish their respective operational and investment capabilities.
1 REMIC floating rate classes have zero Payment Delay days.
2 SOFR from the 2nd Business Day before the end of the Accrual Period is used for each day of the SOFR Suspension Period to allow the Trustee to complete the interest rate calculation for the approaching Accrual Period.
|Ginnie Mae Wants to Help Issuers Increase Their Liquidity |
|by Roy Hormuth | 6/4/2019|
As non-banks have grown to become the largest segment of Ginnie Mae’s Issuer base, how Issuers use their mortgage servicing rights (MSR) has also grown in importance, as it is often the largest asset on the balance sheet for non-banks. This is at the forefront of Issuers’ minds because it is increasingly crucial to use as many tools as possible to generate working capital to manage business operations. Therefore, having the flexibility to use MSRs to shore up cash flow becomes more imperative than ever.
As of late, Ginnie Mae has taken strides to evolve advance financing options of Ginnie Mae MSRs. Top of the list is making our Acknowledgement Agreement more user-friendly for lenders and working with them to facilitate prudent lending on MSRs.
Liquidity boosts value and strengthens counterparties
In 2017, as part of an effort to promote liquidity, Ginnie Mae, along with Credit Suisse and PennyMac, helped introduce the first MSR financing securitization transaction. Since then, we have executed four more securitization transactions. Overseen by an independent credit manager that provides detailed monthly reporting, these innovative securitization transactions are important to Issuers and Ginnie Mae for a number of reasons because they:
- Provide more stable long-term funding (five-plus years).
- Broaden the lender base by bringing in institutional investors.
- Lower the cost of funds by 200 to 300 basis points.
In addition to offering securitization transactions, we aim to increase Issuers’ liquidity options at times of stress. To that end, while historically we have only allowed lending against MSRs, we’re now working out the policy issues to allow lending against servicing advances, in limited circumstances.
Strengthening the value of the asset
As we move forward, we’re keeping the greater context of the market in mind. MSR pricing is tied to interest rates, which means greater stress in the market when interests rates are volatile, as they have been recently. Through conversations at industry conferences and discussions with Issuers, I’ve learned that several MSR deals were put on hold until pricing settled down. But lately, volatility has subsided, and that suggests investors may be taking new looks at entering the Ginnie Mae MSR market. The additional demand could help the value of an Issuer’s MSR portfolio, and that’s a welcome trend.
In addition, Ginnie Mae published a Request for Input (RFI) related to pooling selected VA guaranteed mortgages earlier this month. These higher-LTV VA mortgages have been prepaying at faster rates than economic conditions would predict, damaging the value and liquidity of all high-percentage VA MSRs in the market, while depressing the value of all Ginnie Mae MBS.
We are currently reviewing responses from the industry on the RFI yet there is more to do. As we continue to improve our program, we know how important it is to maintain open dialogue with our industry partners. I’m moderating a panel on MSR liquidity at the upcoming Ginnie Mae Summit and I look forward to engaging with our customers there.