CHLA asks for changes to repooling procedures for modified FHA loans

The Community Home Lenders Association this week called for changes to be made surrounding loss mitigation procedures for defaulted borrowers and the repooling of their loans in the government-insured market, citing the impact of rising interest rates. 

In a letter addressed to Federal Housing Administration Commissioner Julia Gordon and Alanna McCargo, president of Ginnie Mae, the CHLA pointed out the dilemma facing issuers of mortgage-backed securities when FHA mortgages default today.

While previously issuers would implement loss mitigation by buying the FHA-insured loan out of a Ginnie Mae securitization and modifying it before selling it back into a securitized loan pool, those procedures have become challenging, according to CHLA Executive Director Scott Olson. 

"This was not a problem when mortgage rates were stable or falling," the letter stated. "However, Ginnie Mae issuers are now facing two unpalatable options — either an increase in the mortgage rates that could make it difficult to carry out the loss mitigation or the resale of loans into Ginnie Mae pools at steep losses to the issuer."

Economic worries arising from ongoing inflation and geopolitical conflicts have pushed benchmark averages to their highest in over a decade. Since the end of last year, the 30-year rate has risen more than 2%, according to Freddie Mac. 

Olson instead advocated for recommendations made by former Ginnie Mae president, Ted Tozer, who is now a non-resident fellow at the Urban Institute's Housing Finance Policy Center. Olson called Tozer's suggestions a "win/win/win/win for the borrower, issuer, FHA and Ginnie Mae."

Tozer presented a three-step waterfall approach in a recent post for the Urban Institute that would neither require the mortgage to be bought out of the MBS pool or the note rate to increase.

Instead of a balloon payment added to the end of the mortgage term, loan modifications would require repayment of delinquent amounts over a 12-month period, in addition to regular monthly payments. Only if a borrower would struggle to repay delinquent amounts within a year, would it then be added to the end of the loan.

If a borrower still could not make regular monthly payments, the guarantor could allow servicers to add delinquent amounts at the end and defer enough principal to create a manageable monthly balance due, according to Tozer's proposal.

In July, Ginnie Mae issued $45.5 billion of mortgage-backed securities, leading to a monthly increase in the size of its outstanding portfolio by 5.3%. The total balance grew for the thirteenth straight month to $2.25 trillion, up from $2.23 trillion in June and $2.12 trillion a year ago. A month earlier, the guarantor issued slightly over $46 billion, and for fiscal year 2022, activity totaled $203.6 billion.