This week, the Government National Mortgage Association (GNMA, or “Ginnie Mae”) announced that it had delayed a previously-declared January 1, 2021 restriction on the eligibility of Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) for adjustable rate loans operating off of the London Interbank Offered Rate (LIBOR) index to March 1, 2021.
The delay for originators will offer them some additional flexibility in adjusting to an origination environment without the LIBOR index, the standard for several years. The delay also represents that Ginnie Mae has heard the concerns presented by the reverse mortgage industry, according to a representative of the agency.
While some in the industry are generally encouraged by the delay, the timeline between the initial announcement of the restriction and the new implementation deadline will make the process of complying with the delay more confusing and convoluted than it needs to be, according to originators who spoke with RMD.
Ginnie Mae: decision made in consultation with the reverse mortgage industry
When reached for comment, a representative of Ginnie Mae confirmed for RMD that the ultimate decision to delay this restriction was made in direct consultation with members of the reverse mortgage industry.
“Ginnie Mae did contact the [reverse mortgage] industry, the members of which provided us with additional feedback relating to the volume of applications received by the initial publication date,” a Ginnie Mae spokesperson told RMD.
Specific details resulting from the rather abrupt shift away from LIBOR would’ve resulted in difficulties on the funding side of reverse mortgage loans, which was communicated to Ginnie Mae ahead of the decision to delay the LIBOR restriction, the spokesperson said.
“The industry participants we contacted [said] that a number of applications would not be funded in time for securitization in December— due in large part to borrower-side impediments resulting from or associated with the pandemic,” the spokesperson explained. “That is what guided our decision.”
Broker, technology perspectives
For front-lines reverse mortgage brokers and originators, the impact of this delay is generally positive, though likely would’ve been helpful if March 1 was the original date proposed when the restriction itself was initially handed down.
“GNMA’s LIBOR delay is certain to be helpful in the avoidance of ‘orphaned’ LIBOR index-based loans that did not meet deadlines resulting from the prior January 1 LIBOR HMBS restriction date,” said Scott Harmes, national manager of the C2 Reverse division of C2 Financial Corp in San Diego, Calif. “Had this March 1 restriction date been issued originally, instead of the January 1 restriction date, a more orderly and less rushed transition to CMT probably would have resulted.”
For C2, the largest broker in the country, this new development is not expected to influence operations very much since legwork has now been done in migrating to CMT, Harmes explained.
“This delay in the LIBOR HMBS restriction date will have very little impact on both the new and ongoing business for C2 Reverse, as all of our lenders have converted over to CMT-based rate sheets,” he said. “Our standard operating procedure is to now only quote CMT index-based HECMs to our senior homeowners.”
Providers of reverse mortgage technology solutions, such as Bay Docs, LLC which maintains the Reverse Express Loan Origination System (LOS), are not seeing a major impact to operations outside of extending LIBOR support for the time being. This is according to Megen Lawler, president of Bay Docs.
“Bay Docs never turned off the LIBOR, so lenders can still order LIBOR packages,” she said. “I’ll be interested to see if they continue ordering LIBOR products in the coming weeks. The only difference this will make for our internal operations is that we will be updating the LIBOR Important Terms document in January. Other than that, we are all set.”
Originator thoughts: a welcome delay that could’ve helped sooner
While additional time to make this adjustment is welcome, the necessity for action on the part of reverse mortgage lenders is now more pronounced, which has the potential to lead to confusion on the business side of the equation. This is according to Steven Sless, national reverse mortgage division manager at Primary Residential Mortgage, Inc. (PRMI) and branch manager with the Steven J. Sless Group.
“I think while the intention is good given the impacts of the pandemic, the move does inject confusion within the industry as lenders now need to determine their stance,” Sless said. “I don’t feel there is a large impact to borrowers, which of course is good. Similar to the past few months leading up to the CMT transition, I feel there will be another sales push to get borrowers to act now before the new deadline for securitizations. What’s yet to be determined is how pricing will be affected.”
A “steep decline” on pricing for CMT loans compared with what LIBOR products were paying already occurred, and that decline required brokers and lenders to make adjustments to their plans for 2021, Sless said.
“We’re taking a wait and see approach as we have not seen any correspondence from investors as of the time I’m offering this reply,” Sless said. “It’s frustrating that this delay was not granted when lobbied for earlier in the year as it could have prevented a lot of unnecessary confusion now.”
The abrupt change in plans is also being felt by Steve Broaddus, director of the reverse mortgage division at First Alliance Home Mortgage in Feasterville, Penn.
“We have been educating customers about the CMT products since they came out, knowing that the investors were going to stop purchasing LIBOR products,” Broaddus tells RMD. “Now that we know that the LIBOR product has been extended, we will have to wait to see what the new purchase cutoff dates for LIBOR loans will be from the investors. We will educate our new clients on that timeline and discuss the advantages, disadvantages, and risks with them once they become clear.”
Replacement index: SOFR remains industry preference
Once the restriction goes into effect, moving to new indices will be a necessity. FHA has not yet chosen a replacement for LIBOR, as explained at last month’s National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting and Expo by Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding (RMF).
“Because we cannot securitize any new loans that are tied to LIBOR, and because FHA has not yet announced what the replacement indices are going to be for the LIBOR indices [tied to] the existing loans that we have all originated, we only had one choice, and we had to move fairly quickly,” DeMarkey explained. “The choice that we had in front of us was to stop originating — which no one wants to do — [or] to only originate loans that are tied to CMT indices.”
The official recommendation from NRMLA regarding the selection of a new index is to adopt SOFR, due to its wider use in the realm of financial services according to Michael McCully, partner at New View Advisors.
“We believe that moving to a niche index [like the CMT] for a niche product is the opposite direction [we want to be moving in] that we all are attempting to avoid,” McCully said at the Annual Meeting last month. “We’re really working very hard to make our industry [the providers of] a more mainstream financial solution, and we don’t believe that remaining with CMT, for the long term, will have that intended effect.”