Today Ginnie Mae published APM 20-07, which announces changes to our policy concerning the re-pooling of certain loans that have been bought out of pools. These changes were driven by the borrower relief and loss mitigation policies implemented by the insuring and guaranteeing agencies (HUD, VA, and USDA) in response to the COVID-19 national emergency, and our analysis of how those policies might affect the performance of Ginnie Mae securities and the future price of credit under the federal mortgage programs.
At the heart of this is the issuer’s option to buy a loan out of a pool after 90 days of delinquency. The buyout option exists because – in contrast to the Government Sponsored Enterprises – Ginnie Mae is not the issuer of the pools it guarantees, and does not utilize its own balance sheet to manage delinquencies (in the normal course). The buyout option therefore gives an issuer the ability to have some control over its exposure to the scheduled principal and interest pass-through requirement that applies to loans in pools, as well as to Ginnie Mae’s delinquency thresholds, from which Ginnie Mae has also provided relief to issuers as part of our response to the national emergency.
As with refinances, buyouts can cause an economic loss for security holders when mortgage-backed securities trade at premium prices. As a general matter, the risk of such losses is a normal consequence of investing in this asset class. What Ginnie Mae guards against in particular, however, are scenarios where liquidations (and losses) occur as the result of unanticipated events or gaps in government policy – the risk being that a commensurate loss of confidence in the security on the part of investors would translate into lower security prices and ultimately a higher cost for the homeowners the program is intended to serve.
A combination of circumstances arising out of COVID-19 presents a high risk of triggering buyout activity that could undermine the integrity of the MBS program, namely transactions in which resolution of a delinquency is known to come from an agency insurance or guaranty payment that does not require a buyout – but where a buyout is executed anyway solely to allow the issuer to capture premium security pricing.
Ideally, Ginnie Mae would prohibit only those types of buyouts. But in practice, it is impossible to identify those types of buyouts as they happen; buyouts can occur at different times and are driven by a variety of considerations. Care must be taken, in protecting against transactions that could be harmful to the program, to impinge as little as possible on the ability to buy out loans in the manner the program terms are intended to facilitate.
For this reason, Ginnie Mae’s approach to the unique COVID-19 circumstances is to leave the buyout rules unaltered and instead place restrictions on the ability to re-pool certain re-performing mortgages previously bought out of pools. This should lessen the economic incentives to strategically buy out loans in a way that may be harmful to the integrity of the MBS program (as more fully detailed in APM 20-07), while still maintaining an avenue to redeliver loans into securities guaranteed by Ginnie Mae.
While we recognize that this approach may not be fully satisfactory to any of the constituencies that are affected by buyout and re-pooling transactions, we believe that it represents a reasonable and appropriate balancing of the interests at stake and maintains the focus appropriately on the loss mitigation activities that will help affected homeowners.