Ginnie In Brief
|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.
|The Benefits of Attending the 2019 Ginnie Mae Summit|
|by Michael Drayne | 5/21/2019|
The 2019 Ginnie Mae Summit is fast-approaching, which means Issuers, lenders, investors and policymakers will soon get the chance to hear from, meet and engage with leading figures in the mortgage industry. This year’s two-day event, June 13 to 14 in Washington, D.C., will feature an array of prominent speakers, edifying breakout sessions and insightful panels focusing on a wide range of subjects.
Remarks by high-ranking administration and agency officials as well as policy, thought and business leaders are scheduled throughout the Summit. Along with officials from the Department of Housing and Urban Development and Ginnie Mae, speakers include representatives from the Mortgage Bankers Association, Urban Institute, Freddie Mac, BoA Securities and Credit Suisse.
Attendees will hear from experts about the state of the housing finance system, what’s in store for its future and how stakeholders will be affected. Speakers will touch on recent changes to Ginnie Mae’s MBS guide, certification requirements and compliance reviews as well as areas of upcoming modernization and much more.
In the above video, Michael Drayne, Ginnie Mae’s Senior Vice President in the Office of the President, describes the Summit breakout session that most excites him and the opportunity that it will provide for Issuer participants.
A valuable perk of attending is being able to ask the experts questions. The Summit also features opportunities for professional development such as training sessions, program overviews and networking events.
Don’t miss out on the 2019 Ginnie Mae Summit! Registration and hotel accommodations are filling up quickly, so be sure to book soon.
Register for the 2019 Ginnie Mae Summit
|Send Us Your Input on Proposed Changes to Certain Loan Eligibility Parameters|
|by Maren Kasper | 5/7/2019|
Over the past 18 months, we’ve taken a number of steps to combat lending practices that harm the market predictability of Ginnie Mae mortgage-backed securities (MBS) and increase the cost to borrowers financed by the government mortgage programs Ginnie Mae supports. Loan-level data analysis and input provided by investors directly and clearly indicates that the Ginnie Mae II Multi-issuer Program (GII MIP) securities, backed by selected Veterans Affairs (VA) mortgages, are susceptible to refinance activities out of proportion to what should be expected from prevailing interest rates. In addition to their effect on Ginnie Mae MBS, such refinancing practices can negatively impact borrowers’ financial situations.
Deterioration in the pricing of our GII MIP securities translates directly into a higher cost of homeownership for the homeowners the Ginnie Mae MBS program is intended to serve, including all VA, FHA and USDA borrowers. Therefore, it’s vital we take the steps necessary to protect the value of the Ginnie Mae security. Doing so will ensure the lowest possible rates for all borrowers in the program and protect VA borrowers from excessively high borrowing costs.
As part of this effort, we’re evaluating whether to exclude or restrict certain categories of loans that have shown the tendency to pay off faster than loans originated under more restrictive FHA, Fannie Mae or Freddie Mac loan-to-value (LTV) policies. For example, we’re taking a targeted look at VA cash-out refinances in excess of 90%. To support our evaluation, we’ve issued a request for input to solicit thoughts from stakeholders about the impacts of potential changes.
We know placing restrictions on any loan category has implications for borrowers, our Issuers and, ultimately, investors in our security. Because of this, we’re seeking guidance, which we will review carefully.
The RFI seeks insight into:
- The acceptability of pooling mortgages by different loan categories based on varying expected prepayment performance.
- Whether the threshold for our contemplated restriction should be set at a 90% LTV.
- What the impact of high LTV VA cash-out refinances is on the pricing of GII MIP.
- Alternative paths for the securitization of loan categories that we want to restrict from the GII MIP.
Ginnie Mae has the authority to implement requirements for acceptable loan characteristics on mortgages issued into our securities if we believe doing so is essential to the overall effectiveness of the MBS program. We’re committed to using in-depth analysis and evaluation to make educated decisions that will help protect the price of the security. Maintaining the value of Ginnie Mae securities in the market is the surest way for us to help keep mortgage rates low for American homeowners.
Read the request for information.
Respond to the request by emailing firstname.lastname@example.org no later than 3 pm Eastern Time on May 31, 2019. Responses will be kept confidential and will not be made available to the public.
|What You Can Expect at the 2019 Ginnie Mae Summit|
|by Maren Kasper | 4/9/2019|
The 2019 Ginnie Mae Summit, scheduled for June 13-14, is your chance to meet and network with members of the mortgage finance industry. It is a unique opportunity for issuers, lenders, investors and policymakers to convene in the same room and discuss topics ranging from counterparty risk to platform modernization. In the above video, Ginnie Mae’s Acting President and EVP Maren Kasper discusses the reasons why this event is one that members of the mortgage finance industry will not want to miss.
Registration and hotel accommodations are filling up fast, so be sure to book soon: https://bit.ly/2K1hL2r