The problem with Ginnie Mae's new restrictions
Just before the July 4 holiday began, Ginnie Mae issued new guidelines on early buyouts of reperforming loans. The term "reperforming loan" means a mortgage loan that is not more than 30 days delinquent, that was previously bought out from a pool or loan package backing a Ginnie Mae MBS, and that retains the same rate and terms as the rate and terms associated with such loan on the date the loan was previously securitized in a Ginnie Mae MBS.
Why is this rule change significant? Because it constitutes the latest insult and injury to government lenders and servicers by Ginnie Mae and HUD, and yet another concession to large Wall Street investors. Simply stated, the rule prevents servicers from selling RPLs into new Ginnie Mae pools, thereby robbing the servicers of any economic benefit of the early buyout.
By making early buyouts on RPLs unattractive, Ginnie Mae hopes to reduce prepayment rates on its MBS. The sad part of this mess is that lenders and servicers are paying not only for bad decisions by Ginnie Mae, but equally bad policy by another agency across town, namely the Federal Reserve Board.
By purchasing hundreds of billions in Ginnie Mae MBS since March, the Federal Open Market Committee has badly distorted the mortgage markets, driving up prices for agency and government MBS. We encouraged mortgage bond purchases back in April, but the FOMC has refused to moderate its purchases even as the bond market recovered. Indeed, the near-hysterical members of the FOMC have started to purchase private debt, another unneeded subsidy for the big Wall Street investors.
When a global investor like Black Rock, PIMCO or the Bank of Japan pays 106 for a Ginnie Mae 2.5% coupon MBS, and then receives prepayments at par, that is obviously a source of concern for investors. Ginnie Mae is sensitive to the feelings of large investors, but it should not confuse matters of concern with fundamental legal obligations. Ginnie Mae has a legal obligation to support the mortgage markets, both the consumers and the lenders that serve them.
Yet neither Congress nor HUD nor the FHFA have served the issuers and servicers that are dealing with COVID-19. Congress arbitrarily imposed costs and expenses on servicers of conventional and government insured loans, costs that may never be reimbursed even partially. More, both the HUD and the FHFA have penalized servicers through a series of poorly thought out policy decisions that, rather than being of assistance in combating COVID-19, further add to the stress on lenders and servicers, and also on consumers.
"These policies unfairly penalize lenders for loans that were fully underwritten according to FHA or enterprise requirements," notes House Financial Servicers Committee Chair Maxine Waters, D-Calif. "They have contributed to significant credit overlays that may be disproportionately impacting access to credit for minority and other underserved borrowers, and they may also be preventing borrowers from accessing forbearance and other protections available for federally backed loans."
Both the FHFA and Ginnie Mae are actively involved in a campaign on behalf of global investors to prevent American consumers from exercising their legal right to refinance. This campaign is couched in phraseologies like the following: "In supporting the borrower relief and loss mitigation options made available by the federal mortgage programs, Ginnie Mae seeks to ensure that transactional activity related to these options does not impair market confidence in Ginnie Mae securities."
In times of falling interest rates, HUD and the FHFA naturally become more sensitive to prepayment rates because investors will complain. But it is important to remember that nobody forces global investors to pay six-point premiums on Ginnie Mae 2.5s when the Fed is busily gunning the bond market to an obscene and unnecessary degree. If prepayment rates are too high, then why doesn't Ginnie Mae simply raise its guarantee fee? If the level of mortgage refinancing is a concern, raise the effective rate.
The answer, of course, is that it is easier for HUD and the FHFA to beat on lenders and servicers than it is to endure the attacks from consumer advocates if it raises guarantee fees. This is more than a little strange since it is the lenders and servicers that ultimately make the U.S. mortgage market function. In order for Ginnie Mae to make good on its guarantee of MBS, it must operate through an issuer.
Lenders really don't care about the level of interest rates, keep in mind, since lending is largely a fixed margin business. And making early buyouts of delinquent loans is one of the few ways that servicers can mitigate the growing burden of advances of principal, interest, taxes and insurance under the CARES Act. So, when Ginnie Mae tells government servicers not to make early buyouts of RPLs, that is like sending a big "Foxtrot Oscar" holiday greeting card to everyone in the industry, banks and nonbanks alike.
If prepayments are too high, then maybe interest rates are too low. This suggests that the pricing on those Ginnie Mae 2.5s ought to be more like say 103 rather than 106, but again there is that problem with the FOMC. The Fed economists who think they control the U.S. economy have decided that residential housing will pull us out of the COVID economic disaster. This means that short-term interest rates are likely to stay low for years to come and mortgage rates will stay sub-3% for years to come.
What should FHFA, HUD and Ginnie Mae do? The simple answer is let the rate of prepayments on MBS, which is largely a function of the policies of the FOMC, dictate bond prices and market rates. And since the Fed is now the biggest investor in Ginnie Mae securities, tell us again please why high rates of prepayments are a concern to HUD?
If the agencies want to adjust their risk profiles to compensate for the latest injection of "irrational exuberance," care of the FOMC, then raise guarantee fees and manage policy directly. But don't hide behind platitudes regarding the market for MBS when the FOMC has gone a bit overboard with its open market operations. And again, the Fed owns most of the Ginnie Mae MBS.
Guarantee fees are clearly too low given the Fed's disposition to inflate now and worry about the credit and economic consequences later. Instead of making life difficult for lenders and servicers, perhaps HUD Secretary Ben Carson and FHFA Director Mark Calabria should start weighing the impact of the Fed's actions of the risk facing the GSEs and Ginnie Mae. If refinancing is overly brisk and prepays too high, then raise the effective rate of residential loans.