Ginnie Mae’s portfolio of Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) poses a “significant risk” to the U.S. Department of Housing and Urban Development (HUD) in 2024.
The risk stems from the high interest-rate environment of the moment and Ginnie Mae’s seizure of Reverse Mortgage Funding‘s (RMF) HMBS portfolio late last year, according to a new report issued by HUD’s Office of the Inspector General (OIG). The report details some of the biggest management challenges the Department will likely face next year.
‘Unique’ risks from reverse mortgages
The Federal Housing Administration (FHA)’s HECM insurance program relies on Ginnie Mae’s HMBS program to provide liquidity for lenders to continue offering reverse mortgage loans. Still, recent business developments that led to Ginnie Mae’s seizure of RMF’s portfolio require attention, the report said.
“The HMBS portfolio poses a significant risk to HUD in the current high-interest-rate environment,” the report explained. “HECM originations are much more affected by higher interest rates because higher interest rates decrease the funds available to the borrower through a HECM loan.”
HMBS issuers must also buy HECM loans out of their HMBS pools when the borrower of a particular loan has taken 98% of the maximum claim amount, which requires issuers to advance the full balance of the loan before its assignment to HUD.
“In a market with increasing or sustained high-level interest rates, the cost of financing to fund these advances becomes increasingly expensive,” the report explained. “At the same time, increasing rates may result in decreased new originations and refinances, which are significant sources of lender income.”
Based on information provided to the OIG from Ginnie Mae, the top four HMBS issuers comprise 86% of the full HMBS portfolio’s unpaid principal balance (UPB).
“In recent years, the total number of participants in the HMBS program has steadily declined,” the report said. “In 2019, the two remaining depository institutions exited the industry, resulting in Ginnie Mae’s HMBS program being comprised solely of nondepository institutions.”
The RMF effect
On Dec. 20, 2022, Ginnie Mae extinguished RMF, one of the largest lenders in the reverse mortgage industry, from the HMBS program.
“RMF filed for bankruptcy in November 2022 and was unable to sell its portfolio to another issuer, which required Ginnie Mae to terminate RMF’s issuer status, extinguish RMF’s interests in the portfolio, and become the servicer of the portfolio, representing approximately 36 percent of existing HECM loans,” the report said.
The move was unprecedented, marking the first time in the government-owned corporation’s history that it had ever extinguished an issuer with an HMBS portfolio.
“According to Ginnie Mae, it subcontracted with a master subservicer, which RMF had also used, to administer the portfolio,” the report said. “Having the existing vendor relationship supported minimal disruption to the borrower and ensured Ginnie Mae’s ability to service HECM loans.”
Managing the reverse mortgage portfolio
Ginnie Mae then took over responsibility for scheduled and unscheduled draw requests from RMF borrowers, mortgage insurance premium payments, 98% MCA buyouts and investor pass-through payments for a grand total of $1.6 billion, the report said.
Ginnie Mae pointed out in a budget request earlier this year that the complexity of the RMF portfolio required additional staff and budget to adequately manage, even if the size of the portfolio is only a fraction of the total Ginnie Mae portfolio.
“Although the HMBS portfolio at approximately $59 billion is only a small portion of Ginnie Mae’s portfolio ($2.5 trillion), servicing an HMBS portfolio is staff intensive even with a contract subservicer,” the report explained.
“Periods of rising interest rates have challenged HMBS issuers. This condition is especially concerning since the four largest issuers have approximately 86 percent of the remaining HMBS market. Assumption of another defaulted HMBS portfolio could significantly challenge Ginnie Mae’s capacity.”
Earlier this month, the HUD OIG opened an inquiry into Ginnie Mae’s handling of the RMF portfolio and its decision to extinguish RMF from the HMBS program.