Ginnie Mae is actively working with the Veterans Affairs lending community to stop predatory refinancing, according to a top official — and the reverse mortgage industry could find itself under similar scrutiny if the government corporation sees signs of similar behavior.
Speaking at the National Reverse Mortgage Lenders Association’s annual conference in San Francisco this week, Ginnie Mae senior vice president Michael Drayne said the new principal limit factors introduced October 2 could encourage refinance churn.
“I think the industry needs to be careful, particularly given the new program rules and possibilities that have come into place lately to allow business models to arise that are specifically dedicated to the continual refinancing of loans,” Drayne said.
Drayne pointed to the VA program as an example of a federally backed loan that has seen increased refinance activity, often with questionable benefits for the borrowers. In turn, this has the potential to scare off investors on the secondary market, a major problem for overall liquidity and stability.
“You get vociferous complaints about this from securities holders,” Drayne said. “The worst-case scenario is that they vote with their feet, and they just don’t buy the securities.”
That’s why Ginnie Mae has deemed VA refinances a “front-burner issue,” according to Drayne, working with officials from Congress, top VA lenders, and the Department of Veterans Affairs to curb the problem.
Though Drayne didn’t indicate that potentially predatory refinancing is currently a threat to the Home Equity Conversion Mortgage-backed securities (HMBS) market, he emphasized that protecting the performance of those products is a top priority for Ginnie Mae — and that the corporation will step in if it sees evidence of HECM refinance churn.
“If that happens, that’s eventually going to start scaring off security holders, and it will cause Ginnie Mae to take action,” he said.
“I hope these are words that don’t end up having any meaning,” Drayne added, calling on the assembled industry leaders to work to prevent predatory refinancing.
Under NRMLA’s code of ethics, members do not allow borrowers to refinance HECMs unless an 18-month seasoning period has expired, and the transaction provides an actual financial benefit to the homeowner based on certain closing cost and loan proceed standards.
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Ginnie Mae also remains concerned about the small number of HMBS issuers in the marketplace, as well as the high capital requirements required of them.
“It would be good to have more Ginnie Mae issuers,” Drayne said. “It would be good to have different types of Ginnie Mae issuers. It would be good to have banks.”
As the number of loans assigned to the Department of Housing and Urban Development has increased significantly, issuers need even greater amounts of capital to buy them out of the securities once they reach 98% of their maximum claim amounts, Drayne noted.
“When the program was originally created, people thought this would be fairly routine: The loan would be sold out and assigned to FHA,” Drayne said. “In reality, that has turned into a very big deal.”
Delays in assignments can exert severe capital strain on issuers, and Ginnie Mae is exploring policy options to help ease the burden.
“One of the main things that will be driving us is: What can we do that limits the capital demand on issuers?” Drayne said of Ginnie Mae’s policy goals. “Because that could be dangerous for them, and dangerous for us as well.”
Written by Alex Spanko