Ginnie Mae’s HMBS Program is the Holy Grail of Fixed Income Market

With Fannie Mae bowing out of purchasing reverse mortgages in October, Ginnie Mae is the only game in town when it comes to the secondary market.

“There really isn’t any alternative right now,” said Craig Corn, MetlIfe Bank during the National Reverse Mortgage Lenders Association’s annual event in New Orleans last week. “It’s the liquidity for the reverse mortgage market.”

Corn admits that when an investor who has bee supporting the space for almost 20 years leaves, it’s never a good thing.  However, “the practical reality is that it hasn’t been competitive for the last 12 to 24 months,” he said.

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For the most part, the industry shrugged off the exit of Fannie Mae since issuance of Ginnie Mae’s HMBS program has skyrocketed over the last two years, going from $1.357 billion in 2008 to $8.538 billion in 2009 and is on track to set a new record in 2010.

“HMBS is the holy grail of the fixed income market because it has the full faith and credit of the federal government and an excess spread,” said Joe Kelly, partner at New View Advisors during the session.  “It has an extraordinary amount of prepayment protection because it’s an actuarial product and the tremendous success provides the industry a growing secondary market.”

Kelly said the industry needs to resolve the issue of taxes and insurance defaults because “the issuers are focusing on this like a laser beam.  If we can proactively address this, the industry will be much better off.”

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  • Admin brings up a lot of good points from Mr. Kelly. If he failed to discuss Savers his message is interesting but hardly notable.
    As to so called “technical defaults,” is Mr. Kelly advocating that lenders foreclose on technical defaults? It would seem that this would create a problem in the concept of the reliability of HECMs as an actuarially based asset since it would in many cases result in prepayment. Since Mr. Kelly brought up the issue, the question is what does he suggest are the acceptable alternatives to the secondary market in resolving the technical defaults now and in the future among the cohort of HECMs outstanding?
    How would Mr. Kelly approach the technical default issue prospectively on HECMs funded in the future? Does he and his firm still believe that setting aside proceeds into escrow accounts at funding is the best answer? If so, is he talking about actual escrow accounts or set asides? How many years of reserves does he suggest? What category of costs should be included and if maintenance is involved, how should those future costs be determined? How should the issue of increases in those costs be addressed? If set asides seem acceptable, would discounting of the various costs apply?
    Since HUD is allegedly forming a Mortgagee Letter on the issue, it is important we hear from the voices of the secondary market in detail. While making recommendations is no easy task, people like Mr. Kelly and his partners would provide a great service to the industry and the seniors we serve if they provided detailed positions to ponder.
    Separately, as Mr. Corn, the reversemaniac, and The_Critic all agree, it would be good if we had more than one outlet for our products. As Congress addresses Fannie Mae and Freddie Mac, Congress would help us all including borrowers if it exempted HECMs from the Fannie Mae mortgage portfolio reduction requirements and permitted Fannie Mae to buy HECMs at a price similar to that received in Ginnie Mae transactions. If wishes were horses, beggars would ride.

  • Joe should know better than to name the HMBS as “the holy grail of fixed income market.” Fixed income normally refers not to the rate at which an asset grows but rather the rate at which the income is paid to debt (or in some cases like preferred stock, equity) holder.
    The HMBS is principally a growth asset with required monthly payouts (MIP), “an odd fish to describe as fowl.”

  • >>Does he and his firm still believe that setting aside proceeds into escrow accounts at funding is the best answer?

    I don’t think that’d work for two reasons. First, a lot of homeowners don’t have the additional proceeds to fund an escrow account. Second, we’d be in the same position we’re currently in when the funds in the escrow account run out. For example, the escrow account is funded for 10 years but the Reverse Mortgage lasted 20 years.

    I’ve been thinking about this for a while, and although it rubs against my grain, the only solution I can think of is requiring monthly payments for property taxes and homeowners insurance … Yech.

    • Mr. Denton,
      And what happens if after the first year, the borrower can no longer make monthly payments? This leaves the situation not much different than it is now. The borrower would probably stop paying monthly payments about the same time the borrower would have stopped making direct payments.
      What costs should be included in the payments? Should it be taxes, insurance, maintenance, HOA, savings for potential but unknown assessments, and something else? Remember there is some worry over deferred maintenance as well. How should increases be calculated since the payment will generally have to be collected before the increase is known.
      Please explain the mechanics of monthly payments and how they are better than escrow accounts and set asides in deferring foreclosures.
      Perhaps both are needed. The servicer retains the set aside or escrow accounts and if the account has to be tapped to pay a bill, the borrower is tapped for monthly payments or automatic electronic transfers.
      Imagine explaining that mess to a prospect or trying to decipher a billing statement with your borrowers. Our jobs will not become easier and borrower discontent will rise.

  • The reality is that the borrowers that appear most likely to default on T&I (those that take full draw at closing) from looking at the data are also least likely to have enough proceeds to fund a set-aside or escrow.

    In that context, either solution is likely to create a situation where we simply weed out the most likely defaulters through underwriting reducing their proceeds enough that they can’t payoff existing loans. Doesn’t solve the homeowner’s problem but does keep something that was likely going to happen in any event from becoming our industry’s problem to deal with (and us from being the scapegoats for a problem we really didn’t create).

    As to the two options suggested, a big problem with an escrow funded by a fully drawn HECM would be the escrow interest rate being substantially lower than the note rate accruing on advanced funds. Any savvy borrower should take issue with that. So in a fully drawn situation a set-aside seems more financially appropriate.

    In the context of a monthly payment plan borrower, an escrow would seem much more reasonable as it simply becomes a mechanism to withhold T&I amounts and pay on behalf of borrower as they’re likely already accustomed to from their forward mortgage days. The same interest gap exists, but on a much smaller amount and with a much more defensible borrower benefit of payment planning.

  • >>And what happens if after the first year, the borrower can no longer make monthly payments?

    The Note goes into foreclosure, as per the terms of the loan agreement – just like with a traditional Forward Mortgage.

    >>This leaves the situation not much different than it is now.

    The primary reason (from what I’ve read) homeowners haven’t been paying property taxes and homeowners insurance is because they said nobody said they had to pay, so they didn’t know they were responsible for those obligations. That excuse wouldn’t exist if they made monthly payments into an escrow account since the inception of the loan – that excuse would terminate.

    >>The borrower would probably stop paying monthly payments about the same time the borrower would have stopped making direct payments.

    Making direct payments to who? I’m not sure we’re following each other. I’m talking about making monthly payments into an escrow account, not mandatorily funding the escrow account from the proceeds of the loan.

    >>Should it be taxes, insurance, maintenance, HOA, savings for potential but unknown assessments, and something else?

    HUD’s primary problem are property taxes and homeowners insurance, so those two would be paid monthly into the escrow account.

    >>Please explain the mechanics of monthly statements and how they are better than escrow accounts and set asides in deferring foreclosures.

    Explain the mechanics? I wish I had that much spare time on my hands. It’d take a committee quite a while to design the mechanics behind any method that’s implemented.

    • Mr. Denton,
      A direct payment is a transfer of funds from the borrower to the property tax collector or to the insurance carrier with no intermediary or facilitator. A payment to an escrow account is not a direct payment to the vendor; it is an indirect payment to a facilitator which accumulates the monthly payments and it makes the required payment to the respective vendor on behalf of the borrower.
      You have assumed that the reason no payments are being made is due to inferior care by originators and counselors. While that reason may be significant, it is doubtful if it is the most dominant or primary reason. Most are not making payments because they do not have the wherewithal to do it; seniors are experiencing losses in their economic purchasing power when one looks not only at income but also overall inflation in costs from all sources including increased Medicare. That is one significant reason for the institution of FIT and BCU in counseling.
      The third paragraph of the reply to you above has now been changed from “Please explain the mechanics of monthly statements…” to “Please explain the mechanics of monthly payments….” I apologize for the confusion. I really do not believe it will take a committee to explain it.
      The costs to servicers would rise considerably for creating, maintaining, accounting for, and following up with late payers for escrow accounts where borrowers are making monthly payments to servicers. (Where is an available line of credit, some of the problem can be taken care of through direct payments to the lender through the line of credit.) The earnings to the servicers from these accounts may not be sufficient to cover the costs of maintaining them. The one thing about the idea that has considerable merit is that borrowers would not see any reduction in available proceeds.
      Taxes and insurance are not the only concerns which have been discussed. They are, however, two recurring costs which are common to all HECM borrowers. Once we travel down the slippery slop of taxes and insurance, the other areas of concern would quickly follow. Having an answer in advance seems appropriate.

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