Ginnie Mae Official Discusses How to Replace LIBOR

Both the Government National Mortgage Association (GNMA, or “Ginnie Mae”) and the Department of Housing and Urban Development (HUD) have discussed how to implement a change to their rate index, moving away from the current London Inter-bank Offered Rate (LIBOR) standard.

This was an element of a presentation made by Michael Drayne, SVP at the office of the president at Ginnie Mae, made last week at the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting in New York.

After international investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. In 2014, the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternative rates, and to develop an implementation plan.

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Two of the organizations participating in the Fed’s ARRC are Ginnie Mae and HUD.

“We’re looking at this, HUD is looking at this, and we’re all participating in the industry working group convened by the Federal Reserve ARRC,” Drayne told conference attendees. “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is. We at Ginnie Mae have indirect exposure to this issue. In the end, on the government side, it’s up to the Secretary of Housing to determine what the main rate is going to be.”

Ginnie Mae’s purpose in the overall process is to determine how exactly to facilitate the transition to whichever rate is ultimately chosen, Drayne said. The fact that Home Equity Conversion Mortgage-backed Securities (HMBS) issuance is heavily focused on adjustable rate mortgages (ARMs) will play into the ultimate decision, and a rising LIBOR index (and other interest rates) could also result in lower principal limit factors (PLFs), thus further decreasing HMBS issuance volume.

“To the extent a Ginnie Mae issuer wants to be in this market, we think that should be part of a diversified business plan,” Drayne said. “We want to make sure that they’re committed to the reverse mortgage business and committed to helping senior homeowners.”

A forward mortgage issuer proposed a change to the index for a particular transaction involving one of its multi-class securities, Drayne said. That issuer implemented one of the favorites to replace LIBOR, the Secured Overnight Financing Rate (SOFR).

“A forward mortgage Ginnie Mae issuer proposed using SOFR in a multi-class security,” Drayne described. “Ginnie Mae studied this proposal, and allowed the relevant transaction to take place. We decided that the proposal made to us was workable and we supported it. There’s now a SOFR-indexed Ginnie Mae real estate mortgage investment conduit (REMIC) that’s out in the marketplace. This doesn’t imply that we’ve made any decision – nor is it our place to – [determine] what the ultimate index should be for any government lending program that uses LIBOR today.”

There will likely be new proposals made to Ginnie Mae that involve reverse mortgages, Drayne said. If they meet Ginnie Mae’s standards, then they will likely be added into the market.

“This doesn’t mean there’s any change that’s been made officially within the government lending arena in terms of an index that replaces LIBOR on the mortgage note, or on Ginnie Mae MBS,” he said.

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