Ginnie Mae Cuts Servicing Fee
The Government National Mortgage Association has revamped its 18-year-old Ginnie Mae II securities program by reducing its minimum servicing fee in a move that could lead to a similar change in the conventional market.
Ginnie Mae reduced the minimum servicing fee from 44 basis points to 19. However, lenders who prefer to receive excess servicing fees can still receive the traditional 44 basis point fee.
The change, part of a serious of reforms designed to improve pricing for the Ginnie Mae II program, may put pressure on Fannie Mae, Freddie Mac and MBS investors to reduce the servicing fee on conventional loans sold into the secondary market. Currently, Fannie Mae and Freddie Mac require a minimum servicing fee of 25 basis points.
This change by Ginnie Mae divided lenders, and the Mortgage Bankers Association did not take a position on the servicing fee issue.
But Ginnie Mae president Ronald Rosenfeld felt a reduction in the minimum servicing fee would give lenders more flexibility and hopefully improve the pricing on "odd coupon" mortgages that go into Ginnie Mae II securities.
"Historically, the program has best served those lenders that prefer to generate their greatest revenue through mortgage servicing. Now, those lenders that prefer to generate their greatest revenue through the origination of Ginnie Mae securities will also benefit," Mr. Rosenfeld said.
To make Ginnie II MBS more attractive to investors, the secondary market agency narrowed the spread on the note rates that can be included in a Ginnie Mae II single-family pool from 100 basis points to 50.
The Mortgage Bankers Association supported this change. "This should make the prepayment speed more predictable, which will help improve pricing," said MBA vice president Steve O'Connor.
The Bond Market Association, which worked with Ginnie Mae on reshaping the Ginnie Mae II program, views the changes as a positive. "This will help to streamline the program, which will tighten pricing" relative to the Fannie Mae and Freddie Mac MBS programs and the Ginnie Mae I program, said TBMA vice president Nadine Cancell. The associate general counsel also expects lenders will put more loans into Ginnie Mae II securities due to the changes, which go into effect July 1. As this issue of MSN went to press, a spokesperson for the BMA said the trade group had not taken a position on whether the minimum servicing fee for Fannie Mae and Freddie Mac loans should be reduced. Mike May, Freddie Mac's head of single-family business, said the corporation is open to debate about reducing its minimum servicing fee and has discussed the issue with lenders.
"What we need is to make sure the servicing fee fairly compensates the servicer and keeps them interested in their work," Mr. May said.
Fannie Mae spokesperson Alfred King said Fannie Mae is aware of lender interest in the servicing fee issue and is "always looking to find ways to work with them to meet their business needs." But he said Fannie Mae had no comment on any specific plans to change the minimum.
GNMA guarantees MBS backed by Federal Housing Administration, Department of Veteran Affairs and Rural Housing Service mortgage loans.
The government-owned secondary market agency issued the first MBS in 1970 and it created the Ginnie Mae II program 18 years ago to securitize "odd coupon" mortgages with interest rates like 6 1/8% or 6 3/4%.
Ginnie II was designed to complement the agency's original Ginnie Mae I program, which only accepts even and half-coupon loans with a 7% or a 7.5% interest rate, for example. But Ginnie Mae II securities have always lagged the Ginnie Mae I program in terms of pricing and volume.
Currently, a lender can only put a 6 1/4% mortgage loan in a 5 1/2% Ginnie Mae II MBS, which leaves 69 basis points in excess servicing fees and 6 basis points to pay for the Ginnie Mae guarantee fee.
Under the new program, lenders will be able to place the 6 1/4% loan in a 6% Ginnie Mae II security and take the minimum 19 bp servicing fee.
Lenders who supported this change said "their business model would be more effective if they could eliminate some of this excess servicing," according to Ginnie Mae vice president Ted Foster.
So Ginnie Mae decided to give the lenders more flexibility in determining the servicing fee.
"On the other side, we are creating a more predictable product for Wall Street, which we think they will like more than the existing Ginnie II," Mr. Foster said.
Ginnie Mae also decided to give Wall Street investors greater assurance that Ginnie Mae II securities are not packed with buydown loans, which are generally subsidized by homebuilders to reduce the homebuyer's monthly payments during the early years of the mortgage.
Buydown loans only make up 1% of total GNMA II volume. But starting July 1, buydown loans cannot exceed 10% of the total loan amount in a standard Ginnie Mae II security.
Ted Cornwell contributed to this report.
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