Remarks by Michael Drayne, Senior Vice President, Office of Issuer & Portfolio Management, Ginnie Mae
NRMLA Eastern Regional Meeting & Finance and Investment Forum
Wednesday, March 20, 2013New York, New York
I want to thank NRMLA for again providing me with the opportunity to speak to this gathering. We at Ginnie Mae are very conscious of both the uniqueness and special role of the HECM program, and the importance of the Ginnie Mae mortgage-backed securities program to its operation and success. We value the partnerships we have forged with the lending and investing communities, and occasions such as this are useful in fostering a continued strong relationship, for the ultimate benefit of America’s senior homeowners.
The purpose of my remarks here today is to provide an update on our major activities and views regarding the HMBS program. But I’ll preface this topic with a statement I make just about anytime I speak on behalf of Ginnie Mae: Understanding how Ginnie Mae views anything depends simply on understanding what Ginnie Mae is. This is a frequently misunderstood subject, and we make it a point to be vigilant about explaining our model, and correcting the idea that we are more analogous to Fannie Mae and Freddie Mac than is in fact true, as well as addressing confusion about how we relate to or interact with FHA.
Ginnie Mae can be described as simply a mono-line insurance company owned by the federal government. We insure mortgage-backed security holders against loss, by guaranteeing that they will be paid according to the terms outlined in the prospectus. We don’t buy loans, or issue securities, or set rules for originating or servicing loans – the latter being the province of FHA. Our primary concern is that the money for the security holders moves from one place to another, at the time and in the amount specified.
Today, we have about $1.4 trillion of this insurance in force, in the form of outstanding MBS balances, or – seen from the other side -- Ginnie Mae mortgage servicing rights. This is about a 10% increase over last year. The HMBS portion of this figure today stands at about $40 billion, about 3% of the total – but a 25% increase over last year.
I’ll mention one other set of figures that I think is particularly interesting. A distinguishing feature of the Ginnie Mae HMBS program is the ability to securitize multiple successive pieces of the outstanding balance of a single reverse mortgage. Last year there were 1.3 million of these pieces in existence, at an average of about $24,000. One year later, there are over 3 million pieces being serviced, at an average of about $12,000.
All in all, therefore, even in a time of reduced origination volumes, from a purely Ginnie Mae standpoint the HMBS balances and component pieces are continuing to increase substantially.
Numbers aside, our position with respect to the HMBS program remains unchanged. It is our mandate and core mission to use our government guarantee to support the lending programs of HUD, as well as our other partner agencies, thus attracting capital into the U.S. Housing System. We are enormously proud of the work that was done at Ginnie Mae to create the HMBS product, and we take seriously our continuing role in supporting HECM lending. We are fully committed to this program.
I will turn now to the topic of: what is Ginnie Mae thinking about these days in connection with reverse mortgages and the HMBS program.
Issue number one is unchanged from last year: sale accounting treatment, or lack of same, for HMBS transactions. As most of you probably know, evolving accounting standards have resulted in the classification of these as financings, the impact of which is highly unwelcome to most issuers, and has kept some potential issuers from participating in the market.
Because this situation has such a pronounced impact on our program, Ginnie Mae has been deeply engaged in an effort to find a constructive solution. This has been an extraordinarily complex and time-consuming endeavor, because of the unique nature of the program and the fact that the statutory and documentary underpinnings of the program predate and don’t fit neatly with the accounting standards and points of interpretation that are now critical.
Nonetheless, after an extensive examination of the issue from both a legal and accounting standpoint, and with the assistance of independent legal and accounting consultants, Ginnie Mae maintains its position, as follows: the securitization of HECM mortgages is to be considered an absolute transfer by the Issuer under the Ginnie Mae guaranty agreement. Accounting for the securitizations as financings, therefore, does not seem to us to be the best representation of the essential nature of the transaction.
Having undertaken this examination, and validated our view, we are prepared now to continue the dialogue with the accounting authorities, and represent our opinion as the sponsor of the HMBS program. We cannot be sure what course this dialogue will take from this point, but we feel that our long review has been beneficial, and we pledge to continue to make our best attempt to be communicative with stakeholders in the HECM/HMBS program in a manner that is respectful of the concerns and prerogatives of those involved in deciding the question.
I wanted also to touch briefly on two other issues that are not so much on the front burner, but that we at Ginnie Mae want to suggest are worthy of consideration and exploration by industry participants, as we all work to re-establish a sound footing for the future of reverse mortgage lending.
The first has to do with the value of HMBS securities in the marketplace, and the characteristics that drive that value. We are mindful of the extraordinary premium prices that these securities attract. Our belief is that going forward there will be increased scrutiny of the impact and use of these premiums, and the appropriateness of the interest rates that generate them. While in a general sense we view the premium pricing attached to Ginnie Mae securities as a positive attribute and prime example of the strength and value of the Ginnie Mae program, at the same time we do not wish to see these premiums result in distortions that detract from the program’s intended purpose. We are working closely with FHA in its exploration of the ways in which the HECM program can be modified to preserve its contribution, and believe that this is an area that will be explored as part of this. We also encourage the industry to continue its own examination of lending practices, and consider how to foster any improvements that are at the discretion of lenders and not dependent on defined program mechanics such as principal limit tables.
The second issue concerns the importance of a diverse HECM servicing infrastructure to support the future growth that we all wish to see. We are conscious of a long-term trend that we think could potentially be problematic in the future if it is not reversed: many of the institutions that have now left the scene or curtailed their participation in the industry maintained proprietary platforms for effectively servicing reverse mortgages. While there are heartening signs that newer entities have and will continue to replace the origination capabilities of these departed institutions, we see a dearth of newer entrants in the field of servicing. There is, consequently, a consolidation of servicing capability that we are concerned could be limiting from the standpoint of Ginnie Mae. In our conversations with current or prospective industry participants, we will be exploring ways in which the diversity and capacity of HECM servicers can be further developed so as to keep pace with the needs of a thriving, multi-faceted market.
As a final thought, and on a positive concluding note, I want to express just how impressive I find the resilience of this specialized segment of residential finance. This has been a protracted period of adjusting to a series of challenges; it can’t have been easy for anyone involved, and it isn’t over yet. I can only tell you that Ginnie Mae can be counted on to work in good faith with our partner agency FHA to enable this program to be successful and a long-term contributor to the many Americans who have relied upon it to date or will in the years ahead. Our ongoing relationship with the lending and investor community is crucial to this success.
Thank you again for this opportunity, and for your attention.