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