In speaking with mortgage bankers Monday, Ginnie Mae president Ted Tozer said the agency is making moves to “triage” its application “problem” after finding that about half of those lenders to apply in the last year have not been approved, and of those that have been approved, many have yet to issue securities, according to a report by National Mortgage News.

“We really want a large issuer base,” Ginnie Mae president Ted Tozer [said].

The Ginnie Mae president, speaking on a secondary markets panel, said the agency is adding some account executives to its traditionally lean staff and hopes to push through the best prospects first, making the processing time shorter for players with complete applications and strong capital levels.In fiscal year 2011, out of 85 applications, 35 were approved, and 50 were either denied or withdrawn, Tozer said. Of the 35 approved, only 22 have issued securities.

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Written by Elizabeth Ecker

The new guidance does not include HMBS pools, a Ginnie Mae spokeswoman told RMD. It will apply to all other Ginnie Mae MBS pools.

Through an All Participants Memorandum issued this week, GNMA said it will require new information about the loans in its pools, including whether the loan was originated by a mortgage broker or correspondent lender. It will also require notification as to whether the loan is a first time homebuyer and for FHA loans, issuers will be required to disclose the annual and upfront insurance premium amounts.

The new reporting requirements go into effect in September and beginning January, Ginnie Mae will begin to reject pools from being issued if they do not include the new data components, according to the APM.

Written by Elizabeth Ecker

In late 2011, issuance of Ginnie Mae pools had fallen to less than $600 million monthly, with November and December totaling $563 million and $599 million, respectively.

Upon the exits of several large issuers from the industry, there has been some discussion surrounding the volume decline for secondary market investors. New Ginnie Mae-approved lenders such as One Reverse Mortgage and Live Well Financial have indicated they will look to begin issuing in 2012.

Written by Elizabeth Ecker

Heading into 2012, investor demand was strong, says Jeff Traister, managing director and HMBS trader and managing director for New York, N.Y.-based Cantor Fitzgerald. “Coming into 2012, there was a lot of money on the sidelines and a good chunk finally got put to work,” he says.

And in recent weeks, demand for Ginnie Mae Home Equity Conversion Mortgage securities (HMBS) has improved even further, positioning the products closer to more traditional investments, and having a trickle down effect leading to improved pricing for originators and reverse mortgage brokers.

“HMBS has tightened spectacularly in the past week across fixed and floating and different vintages,” says Darren Stumberger, managing director with New York, N.Y.-based Knight Capital Group, owner of Top-10 reverse mortgage producer Urban Financial. “Whereas Reverse Mortgage MBS has lagged other sectors in terms of ratcheting in, some of the gap has closed recently.”

This improvement takes place in light of lenders and HMBS issuers such as Bank of America and Wells Fargo leaving the reverse mortgage space last year.

Issuance in 2011 totaled just less than $10 billion with an additional $3 billion in HECM Real Estate Mortgage Investment Conduits, or HREMICs.

New issuers such as Urban Financial Group have stepped in to fill the issuer void left by the Bank of America and Wells Fargo exits from last year, but few have been approved since.

“I want people to be committed to the industry to get into issuing HMBS,” Ginnie Mae President Ted Tozer told RMD during a January interview. “We’re looking more for quality than quantity.”

Yet since Urban received its approval, the only other reverse mortgage lender to become approved by GNMA is Live Well Financial, a relatively small lender based in Maryland. Others like Cherry Creek’s 1st Reverse Mortgage USA, which closed close to 400 loans last year, have applied to issue as well.

But despite a growing list of lenders who wish to become GNMA approved issuers, overall industry origination volume has fallen about 27% on average since the major lender exits in 2011, according to estimates from Reverse Market Insight.

“I do have concerns about volume levels as not having enough product to go around makes it difficult to maintain investor interest,” Traister says. “No one likes to chase what appears to be a decreasing supply of product.”

The Saver

The HECM Saver, now in its second year of origination, has yet to amass the data needed to adequately attract investor interest, says Chris Mullins, Chief Operating Officer of Irvine, Calif.-based reverse mortgage lender American Advisors Group.

“[The interest from investors] will come down to prepayment speed,” Mullins says. “If they’re not comfortable with the prepayment rate, they are not going to buy it,” he says. “It’s going to take at least two years for people to get comfortable.”

AAG does not currently issue HMBS securities and declined to comment on whether it is in the company’s future plans.

With origination of the new HECM Saver product starting in October 2010, about 10% of reverse mortgages done today are savers according to HUD data. But the product hasn’t made the splash FHA initially projected it would, with initial projections placing the Saver proportion of the market around 20%.

“The HECM Saver is a very important product,” Stumberger says. “We’re hoping that it gains more traction in the market. To some extent it’s a different type of borrower, and there hasn’t been much volume—last year was just north of $300 million in origination, if that.”

What it will take for the product to sell to investors however, is time.

Due to the Saver being new, pricing is less attractive now than the Standard in wholesale and correspondent channels, Stumberger says, causing the majority of the product to be originated through retail channels.

“Prices paid to brokers and bankers need to improve for Saver volumes to rise, and prices will rise once the gap closes between Saver and Standard execution in the capital markets.”

Growing Pains

The investor market may be stable, but it hasn’t exactly grown. Until volume of reverse mortgages rises, the HMBS product will likely remain on the sidelines, traders say.

A recent development in investor products should open the door at least in the short term. The Yield Book, an investor analysis tool developed by CitiGroup, has recently expanded to include HECM analysis. The change is very well received in the secondary market because there are some investors who will only consider an investment if it can be run through the Yield Book.

“It’s a fantastic development, and think it will help attract new entrants to the space and help liquidity,” Stumberger says.

But large-scale interest isn’t likely to come until volume shows an uptick. With volume hovering around the 70,000 mark in 2011 and projected to remain around 71,000 in 2012, it remains to be seen what it will take for that to happen.

“This is still a pretty small industry,” Mullins says. “As the industry grows, larger players come in. They want to gobble things up in the $500 million range. It’s just a matter of time.”

Knight’s purchase of Urban Financial in 2010 gave the company access to Urban’s production and issuance. Cantor Fitzgerald, while not a producer, is making an effort to grow the investor base as well.

“We are constantly talking and meeting with new potential investors,” Traister says. “We are also working on elements that will vastly improve investor confidence in addition to product valuation abilities. We intend to do everything possible to mainstream HMBS product.”

HMBS mainstays remain positive about the future, even if today’s volume is not where it needs to be.

“At the end of the day, there’s strong support from HUD for the program,” says Stumberger. “…it’s conceivable some of the larger commercial banks re-enter the space to serve this consumer segment once the atmosphere calms down.”

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.

Written by Elizabeth Ecker

The top three issuers as of quarterly data reported in November 2011 measuring original principal balance were Urban Financial ($178 million), MetLife ($136 million) and Reverse Mortgage Solutions ($117 million). This compares with the top three issuers as of November 2010: Bank of America ($246 million), Wells Fargo ($229 million) and Reverse Mortgage Solutions ($135 million).

Ginnie Mae says that despite the changes, the outlook for HMBS issuance is bright, with several lenders stepping in to begin issuing in 2012 or already with issuance under way.

“When those issuers left, others stepped up to help volume,” says Ted Tozer, president of Ginnie Mae, noting the entries of Knight Capital Group and Quicken Loans into the issuer landscape. “People are getting out, people are getting in, but people perceive that seniors are going to need to tap into equity in their home to supplement retirement savings and social security,” he says. “The capacity is there.”

One such lender, Urban Financial Group, received its approval in the first quarter of 2011 and began issuing shortly thereafter. It has since risen through the ranks to the top-5 issuers and completing the greatest issuance of that group according to Ginnie Mae’s issuance tracking as of November 2011.

Urban has attributed much of its recent success to its HMBS pools, and reported in its fourth quarter and annual earnings conference call in January that it completed $450 million in HMBS during that quarter.

“We are very pleased that we were among the top issuers of HMBS and we fully expect to be a leading issuer in 2012,” Steve McClelland, Knight managing director and Urban Financial’s chief executive told RMD.

Another Top-10 lender received approval in 2011, but has yet to complete any issuance. One Reverse Mortgage, a division of Quicken Loans, has its approval and plans to begin issuing soon, but is mum on the details of when that will happen.

“We are following our plan and are looking at it closely this year,” Gregg Smith, One Reverse president. “It’s one of our initiatives. We’re growing.”

The newer Ginnie Mae issuers have been subject to increased capital requirements, which has ruled out some potential issuers.

The changes, along with a moratorium on new issuers, seem to have done what they set out to do, says Michael McCully, partner with New View Advisors.

“The whole point of capital requirements being revised was to level the playing field,” McCully says. “The folks coming in are relatively sophisticated. They’re all sensitive to it being a big deal and they understand the capital requirements.”

As for what Ginnie Mae is seeking, that capital is key.

“People need to be aware under Ginnie Mae rules, once the balance is 98% a loan must be re-bought,” Tozer says. “They must be prepared to show us how they’re planning to fund that buy. That’s the biggest challenge.”

Written by Elizabeth Ecker

The deals were structured to include some potential losses and the downgrades now reflect a greater loss expectation.

“Falling home prices and longer liquidation timelines expose these transactions to potential losses,” Moody’s stated. “Even though these mortgages are insured by HUD, they could be exposed to losses if the properties backing them are not liquidated within six months of entering REO.”

The rating agency further explained that the risk that loans will take longer than six months to sell after entering REO has risen significantly, a trend which Moody’s corroborated by data from servicers. Currently, approximately 7%-10% of the matured servicer portfolios where HUD has verified that loans are due and payable, consist of loans that have been in REO for longer than six months, Moody’s said, indicating that losses on loans that have sold after six months of entering REO have averaged 20%—in other words, are selling for 20% less than their appraised amounts, on average.

Some of the deals have been consistently plagued with slow prepayment speeds, Joe Kelly, partner of New View Advisors, told RMD.

Moody’s based the downgrade on assumptions including the sale of REO properties at 20% lower than their appraised values, and that all properties in foreclosure will go into REO.

Written by Elizabeth Ecker

“I don’t think the impact on the secondary market will be as significant or as business changing as it would be on the loan side,” says David Fontanilla, Pioneer Analytics & Consulting Group.

The primary comfort to investors is the government guarantee, Fontanilla says. To the extent that the new underwriting will boost the government support of the program, that could be seen as a positive for investors, he says, but the main draw is the fact that their investment will be protected against future losses.

“It’s a step in the right direction,” Fontanilla says. “For the secondary market, it’s a small net positive. Anything that helps ensure the long term viability of the program is important.”

Another potential benefit, he says, could be that if the changes are viewed to help provide sustainability, they might attract new private investment—as long as the underwriting component doesn’t impact volume to a large degree.

As for whether investors will favor some loan pools over others due to the underwriting discrepancy, those who buy and sell the loans say it is unlikely.

“I would think that only the marginal investor, especially ones that are new to the asset, will be more inclined to buy MetLife pools,” says Jeff Traister, managing director for Cantor Fitzgerald.

There is unlikely to be much of a premium on the loans from an investor standpoint, even though the changes do bode well from an overall perspective.

“It’s hard to see right now how all the dominos are going to fall,” Fontanilla says. “The initial instinct for a lot of the investors is they will view as a net positive, but won’t pay more.”

Written by Elizabeth Ecker

Posting record earnings due to lower loss provisioning, Ginnie Mae president Ted Tozer said the agency “beefed up” loss reserves in the previous year, but that it was not necessary to do so in 2011.

“Our business is simple, our approach to risk-taking is conservative, and our ability to finance government-insured mortgages is helping to keep the housing market afloat,” Tozer said.

The company reported that it helped finance nearly 60% of all U.S. home purchases in FY 2011.

In 2011, Ginnie Mae issued a total of $263.3 billion in single family mortgage backed securities, surpassing Freddie Mac’s volume of $251.5 billion and becoming the second largest MBS issuer to Fannie Mae.

Written by Elizabeth Ecker