WASHINGTON – Ginnie Mae continues to take steps to address churning in its mortgage-backed security (MBS) program. These efforts are designed to keep mortgage rates affordable for veterans and first-time home buyers, in addition to preserving the liquidity of the security around the globe. To that end, Ginnie Mae has notified a small number of issuers who are outliers among market participants in the Ginnie Mae multi-issuer MBS on the metric of prepayment speeds. Such deviations from market norms are not acceptable and put a veteran earned benefit at risk. This work builds off the “Ginnie Mae – VA Loan Churn Task Force,” which has been ongoing since September 2017.
Issuers who have been notified are expected to deliver a corrective action plan that identifies immediate strategies to bring prepayment speeds in line with market peers. In the event issuers are unable to demonstrate a path to improved performance, said issuers risk being restricted from access to Ginnie Mae multi-issuer pools. Thereafter, those issuers may only have access to Ginnie Mae custom pools.
“We have an obligation to take necessary measures to prevent the lending practices of a few from impairing the performance of our multi-issuer securities, and thus raising the cost of homeownership for millions of Americans,” said Michael Bright, Ginnie Mae Executive Vice President and Chief Operating Officer. “By addressing the anomalous performance of a few lenders, Ginnie Mae is acting to protect veterans, the broader Ginnie Mae program, the American taxpayer and the consumers we serve. We expect issuers receiving these notices to respond quickly, produce a corrective action plan and come into compliance with our program.”
Denise Rohan, National Commander of the American Legion added, “On behalf of two million members of the American Legion, I applaud the efforts of Ginnie Mae to curb misleading mortgage refinancing marketing targeting veterans and the unscrupulous practice known as “churning” – the refinancing of a loan multiple times to generate profits for lenders at the expense of veterans. Aggressive home mortgage churning creates uncertainty for investors and higher interest rates for borrowers. Our veterans didn’t serve their country around the globe in order to be taken advantage of by unscrupulous lenders at home. The American Legion stands with Ginnie Mae and Senators Warren and Tillis as they work to protect veterans from predatory home lending and ensure veterans have an affordable pathway to home ownership.”
Ginnie Mae’s issuance of these notices directly follows recent announcements of program changes, APM 17-06, Pooling Eligibility for Refinance Loans and Monitoring of Prepay Activity, and APM 18-02, Risk Parameters Applicable to Single Family Issuers. These APMs outline acceptable risk parameters for mortgages backing Ginnie Mae securities and ongoing issuer evaluation.
“We are focusing on outliers that are harming Ginnie Mae’s program, not at issuers that genuinely help support responsible lending,” continued Bright. “The vast majority of our issuers fall squarely in the latter category, and we look forward to continuing to work with them to provide refinance opportunities to veterans, rural communities, and low to moderate-income homeowners.” This action comes after Ginnie Mae completed a comprehensive review of issuer performance, which included an in-depth evaluation of prepayment speeds on the MBS pools of individual issuers. This analysis identified a small number of issuers with prepayment speeds that substantially deviate from the mean for an extended period of time.
About Ginnie Mae
Ginnie Mae is a wholly owned government corporation that attracts global capital into the housing finance system to support homeownership for veterans and millions of low- to moderate-income homeowners throughout the country. Ginnie Mae MBS programs directly support housing finance programs administered by the Federal Housing Administration, the Department of Veterans Affairs, the HUD Office of Public and Indian Housing and the Department of Agriculture Rural Housing Service. Ginnie Mae is the only MBS to carry the explicit full faith and credit of the United States Government.
Questions and Answers
What does Ginnie Mae mean by “loan churning”?
Ginnie Mae defines loan churning to mean an issuer’s use of a set of market schemes to repeatedly refinance a borrower’s mortgage, often without providing a sufficient, countervailing net economic benefit to the homeowner. This practice of loan churning is hurting the FHA, USDA, and VA loan programs, and, by extension, the low- to moderate-income borrowers, rural Americans, and veterans who participate in them.
What impact do churning practices have on Ginnie Mae or its stakeholders?
The vast majority of the loans originated under the FHA, VA, and USDA housing programs are securitized through the Ginnie MBS platform. The churning practices witnessed in recent years are damaging to Ginnie Mae MBS because they cause rapid refinancing of loans in Ginnie Mae securities. This causes investors of all stripes across the globe to withdraw capital from the Ginnie Mae market, which results in higher than necessary borrowing rates for all federal housing program borrowers.
How can churning be addressed in the Ginnie Mae program?
Previously, Ginnie Mae implemented policy changes to diminish the economic incentive associated with refinancing borrowers within months of their initial home purchase (See APM 17-06). Most recently, with APM 18-02, Risk Parameters Applicable to Single Family Issuers, Ginnie Mae took steps to address its concerns regarding the impact of loans in its pools with fast prepayments speeds. Ginnie Mae believes these steps are necessary to keep mortgage rates affordable for veterans and low- to moderate- income borrowers, in addition to preserving the liquidity of the security around the globe.
Some form of a net tangible benefit requirement for refinancings is also an important part of solving this problem, and the VA has been evaluating a range of potential policy actions, including a net tangible benefit test. The idea with such a requirement would be to ensure that the benefit to the borrower is greater than any incremental costs associated with the refinancing terms. FHA did something similar by implementing a net tangible benefit test for refinances in their program. Ginnie Mae’s understanding is that the VA is undertaking a process to identify what makes sense for its program in this area.
Combined, these actions can help ensure a healthy MBS market that provides affordable mortgage rates for FHA, VA and USDA borrowers, and in turn, a continued flow of capital into the U.S. housing market.
What is the primary purpose of APM 18-02 and how does it advance Ginnie Mae’s mission?
The primary purpose of APM 18-02 is to protect the integrity of the Ginnie Mae MBS program and ensure that low- to moderate-income borrowers, veterans, and investors in Ginnie Mae securities are not disadvantaged by the actions of a few outliers.
Multi-issuer securities, by their very nature, trade at a “cheapest to deliver” price. This means that the performance of the worst issuer or servicer often sets the pricing for all other participating issuers in the common security, and therefore the worst can impact the rates for all borrowers who rely on the program. The actions announced in APM 18-02 are being implemented to protect the health of the Ginnie Mae security overall by addressing activity from a few issuers that create pools of loans that materially drag down the average.
Such action is squarely within Ginnie Mae’s historical expertise. In fact, Ginnie Mae’s charter explicitly tasks Ginnie Mae with maintaining and enhancing the liquidity of the secondary mortgage market to ensure the sustained flow of global capital into the U.S. primary mortgage market. This is Ginnie Mae’s primary mission. Ginnie Mae must identify, monitor, and, if need be, implement requirements that maintain the integrity of the common MBS which we administer.
What has been the impact of APM 18-02?
Ginnie Mae MBS have improved in price. Once completed, the analysis suggests that removing outlier loans from Ginnie Mae multi-issuer securities can lower borrowing rates for veterans and FHA and USDA borrowers by as much as a half a percentage point.
What methodology does Ginnie Mae use to determine whether an issuer’s performance is materially worse than its peers as to be an outlier?
Ginnie Mae engaged in a data-driven process of evaluating several aspects of pool characteristics of all issuers against each other. To police our security, Ginnie Mae often choses relative performance, rather than absolute performance, of these metrics because it is the relative performance that suggests outliers. This is similar to so-called “horizontal analysis” performed by prudential regulators.
How many Issuers fall within the category of outlier prepayment speeds?
Under the analysis, only a handful of issuers were shown to be consistent material outliers over an extended period of time. The careful criteria identified market participants whose pool performance clearly and persistently deviates from Ginnie Mae’s norms.
Should Ginnie Issuers be afraid to refinance VA loans that are in Ginnie pools?
Absolutely not. As explained above, Ginnie Mae is concerned with material outliers, not issuers that are genuinely helping to support responsible lending. There are market and borrower dynamics where refinance activity makes absolute sense. Ginnie Mae is here to support the FHA, VA, and USDA programs by bringing capital into the U.S. housing market for these activities. With this APM, however, we are addressing participants in the Ginnie Mae multi-issuer security with prepayment speeds that cannot be explained by economic conditions or market dynamics.