Ginnie Mae Rules On New Fixed-Rate Reverse Mortgage Products

Ginne Mae on Tuesday weighed in on lenders’ ability to securitize loan variations of the fixed-rate federally-insured reverse mortgage product.

The agency, which guarantees and allows lenders to securitize pools of mortgage-backed securities, is prohibiting the inclusion of fixed-rate home equity conversion mortgage (HECM) loans where borrowers can choose a payment plan option allowing future loan advances against the principal limit.

HECM-backed securities issued on or after June 1, 2014 will not be permitted to include these kinds of loans.

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“The origination of HECM loans in which servicers are committed to advancing future funds at a fixed interest rate gives rise to the risk that such advances will become uneconomic should interest rates rise from the time of origination,” says Ginnie Mae in the April 1 memo.

Following the Department of Housing and Urban Development’s changes to the HECM program, many lenders have rolled out a variety of loan options, including ones giving borrowers fixed-rate access to reverse mortgage proceeds one year after the initial disbursement. 

But the risks associated with those offerings are more than Ginnie Mae is willing to take on, the agency said. 

“The impact of negative spreads between a fixed note rate and future prevailing rates could be exacerbated in such loans, and endanger the servicers’ capacity to meet their HMBS obligations, which require the Issuer to maintain the capacity to advance funds as required under the HMBS program,” the memo says. 

HECM loans have future advance obligations ranging from set-asides for servicing fees to accrued interest and mortgage insurance premiums that are eligible to be pooled as participations related to the loan. For fixed-rate HECMs, those obligations carry interest rate risk, even though the risk level is mitigated because the timing and amounts of those advance obligations are generally known. 

“By contrast, timing and amounts of borrower requested advances are unknown,” says Ginnie Mae. “Borrowers who have selected payment plan options other than the Single Disbursement Lump Sum, may change their plans at any time, and request advances in varying amounts at varying times in the future.”

Without knowledge of how much or when borrowers will request loan advances, there’s potential for “excessive levels” of interest rate risk, along with the possibility that Ginnie Mae would need to assume economic obligations from those risks if an issuer defaults. 

In addition to prohibiting the pooling of these fixed-rate HECMs, Ginnie Mae will also monitor issuers with non-agency guaranteed pools containing such loans, as interest rate risk could impact the issuers’ ability to meet obligations for pools backing Ginnie Mae-guaranteed securities. 

Ginnie Mae will not permit fixed-rate HECM loans originated without the single disbursement lump sum payment plan to be included in Ginnie Mae-guaranteed HMBS securities, effective for securities issued on or after June 1. However, securities for these kinds of loans in pools issued prior to June 1 are not prohibited.

Additionally, HECMs originated with a single disbursement lump sum payment plan option selected at closing are not subject to this prohibition and remain eligible for pooling. 

Access the Ginnie Mae memorandum

Written by Alyssa Gerace

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  • Hard to believe we are still grappling with the very same conundrums we were wrestling with more than 10 years ago, that being, how to allow periodic draws on a fixed rate hecm. Originally we thought a fixed rate product with future draws would require setting a different current interest rate at time of each draw making for a servicing nightmare, a loan with multiple interest rates on varying amounts. It was believed way back when that it would be impossible to allow for a fixed rate of interest that could be drawn periodically into the future. How we got this far with no new ideas on this subject is beyond me.
    On a more ominous note:
    If GNMA’s view of the future of interest rates is correct just try to imagine what this will mean for ALL hecms. Rising interest rates will decimate principal limits which are already quite meager under the brave new hecm 60 regime.

  • So, I would imagine that those lenders who have been offering these ‘hybrid’ fixed-rate HECMs with future draws will be pushing hard to get those loans closed and securitized prior to June 1!
    Will be looking for announcements re how they will proceed with originations of these products from this date forward, and how they will be handling their existing pipelines of product which won’t close in time to meet the June 1 securitization deadline. May see a little fast back-pedaling….

  • This is a positive development and a correction to our program before it grew into a larger problem. Beyond interest rate risk why would we want loans which accelerate the use of proceeds?

    Beyond that why HUD want loans that only pay .5% initial MIP designed to disperse all funds on day 366 or the ability to do so? These loans would increase the risk to FHA’s MMI fund while paying less. The same problem which led to the suspension of the standard fixed rate. If Ginnie Mae hadn’t stepped in would FHA had disqualified these products?

  • This is a positive development and a correction to our program before it grew into a larger problem. Beyond interest rate risk why would we want loans which accelerate the use of proceeds?

    Beyond that why HUD want loans that only pay .5% initial MIP designed to disperse all funds on day 366 or the ability to do so? These loans would increase the risk to FHA’s MMI fund while paying less. The same problem which led to the suspension of the standard fixed rate. If Ginnie Mae hadn’t stepped in would FHA have disqualified these products?

  • Some really smart folks rolled these products out with a lot of forethought and caution, can’t imagine they just take their toys and go home just because Ginnie Mae has a problem with it. Stay tuned.

  • The problem is with the secondary market. How can an investor in a HMBS take a risk on a loan product that does not have a payment stream and allows draws on a future line of credit at a pre-determined fixed rate. It is a major risk to an investor, it is like playing Russian Roulette.

    This was a major gamble on the part of these lenders. These are very smart people who created these programs. It appears to me they were gambling with a product that they new was in HUD guidelines but they were not sure how the investment community would react, now they know!

    I feel if the gamble worked out, every one except the investor in the HMBS would have bode very well. This is my view and opinion of the entire situation.

    John A. Smaldone

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